Earnings Call Transcript
LTC PROPERTIES INC (LTC)
Earnings Call Transcript - LTC Q4 2022
Operator, Operator
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 31, 2022. 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.
Wendy Simpson, Co-President and CEO
Thank you, operator, and welcome, everyone to LTC's 2022 Fourth Quarter Conference Call. I am joined today by Pam Kessler, Co-President and Chief Financial Officer; and Clint Malin, Co-President and Chief Investment Officer. 2022 was a hard yet positive year for LTC, and we anticipate much of the same for 2023. Last year, we invested more than $170 million using a wide variety of financing vehicles, making it our strongest investment year since 2015. We were diligent and disciplined in rightsizing our portfolio through the disposition of assets that were either underperforming or are no longer core to our business and through transitioning challenged operators. Our momentum has carried into the new year as we've taken steps to further strengthen and diversify our portfolio to drive sustainable future growth. Our business development team has already been extremely busy in 2023, closing investments totaling over $128 million year-to-date. We are working to identify additional opportunities to fill the financing void many operators are now facing. Access to capital has gotten tighter from traditional sources, making flexible and creative REITs like LTC more competitive in the marketplace. We remain focused on bringing the right financing solutions to strong regional operators who are seeking growth capital in an uneven financial market. While some challenges remain, including labor and inflation, we are seeing positive signs in the industry data. Many of our operators appear to be gaining more stability as we continue to recover from the pandemic, and some of our private pay partners are raising rates without much resistance. Receipt of funds from the employee retention tax credit is providing our operators with some breathing room, allowing them to repay deferred rents. Additionally, realized and expected reimbursement rate increases in several states should benefit our skilled nursing operators and LTC in those areas. One particular headwind for skilled nursing, however, is the ending of the public health emergency, or PHE, on May 11, 2023. There are many benefits tied to the PHE, including the three-day stay waiver with the ability to skill in place, and it remains unclear at present to what extent our industry will be impacted. Our industry has done much great work to address pandemic-related challenges, and I believe we will continue to do so. We operate under the ethos of conservative financial management, which has served us well through many real estate cycles. We've been able to provide needed support to our operators throughout the pandemic while maintaining our regular monthly dividend. Our FAD payout ratio was 77% for the 2022 fourth quarter, primarily due to non-run rate items, which represent the payment of Anthem's temporary rent reduction and HMG's rent increase, which Pam will detail shortly. Given that our fourth quarter results were positively impacted by the timing of these payments, we expect our FAD payout ratio to increase to the low to mid-80% range for the first quarter, excluding nonrecurring items, which is approaching our long-term payout ratio target of 80%. Our guidance for the first quarter anticipates FFO, excluding nonrecurring items, will be between $0.67 and $0.68 per share. $0.06 of the decrease from the fourth quarter relates to the non-run rate items I mentioned, partially offset by increases from recent investments. Going forward, we believe we will see continued progress in our business as operators find new ways to drive occupancy, increase revenue, and lower costs. While the road has been long over the last few years, we are beginning to see operating improvements in our portfolio, although we can't say with certainty how long the 2023 road may be. What we are certain of is that LTC is well positioned to not only withstand any remaining challenges but to continue our strategic and judicious growth. Now I'll turn things over to Pam.
Pam Kessler, Co-President and CFO
Thanks, Wendy. Total revenue for the fourth quarter of 2022 grew by $8.4 million from last year's fourth quarter, due in part to a $4.7 million increase in rental revenue. The increase in rental revenue was primarily related to higher rent received from transitioned portfolios. Additional factors contributing to the increase included receipt of Anthem's second and third quarter temporary rent reduction, rent related to our 2022 acquisition of four properties in Texas, and rent increases from completed development projects and annual escalations. The increase in total revenue was partially offset by lower rent received due to second quarter 2022 property sales. Interest income from financing receivables increased by $1.4 million compared with the 2021 fourth quarter due to the acquisition of three skilled nursing centers in Florida. As a reminder, in accordance with GAAP, we recorded this transaction as a financing receivable because we purchased the properties from an entity and leased the properties back to the same entity under a master lease with a purchase option. Interest income from mortgage loans increased by $1.5 million, primarily due to mortgage loan originations in 2022 and in the fourth quarter of 2021. Interest and other income increased by $858,000 from last year's fourth quarter, mainly due to a 2022 first quarter mezzanine loan origination and working capital originations, partially offset by loan payoffs. Interest expense increased by $1.9 million from last year's fourth quarter, primarily due 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, partially offset by scheduled principal paydowns on our senior unsecured notes. Our provision for credit losses decreased by $888,000, mainly due to a greater number of mortgage originations in the fourth quarter of 2021 and for the same quarter in 2022. 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 $527,000 compared with the 2021 fourth quarter, primarily due to higher incentive compensation and increases in overall costs due to inflationary pressures. During the fourth quarter, we recorded $2.1 million of impairment losses as a result of our recoverability analysis related to a 70-unit assisted living community located in Florida and a closed memory care community located in Colorado. Net income available to common shareholders increased by $5.1 million, primarily due to the net increase in rental revenue I previously discussed, higher revenues from loan originations, and a decrease in provision for credit losses, partially offset by higher interest expense, the $2.1 million impairment charge, and increased G&A expense. Fully diluted NAREIT FFO per share for the 2022 fourth quarter was $0.72 compared with $0.56 for the 2021 fourth quarter. Excluding nonrecurring items, FFO per share was $0.72 compared with $0.59. The increase in FFO, excluding nonrecurring items, was due to the net increase in rental revenue, higher revenues from loan originations and the decrease in provision for credit losses, partially offset by higher interest and G&A expenses. We received rent of $3 million in the fourth quarter related to the 11 properties we transitioned to HMG in line with our expectations. $1 million of the rent received from HMG in the fourth quarter relates to prior periods and should not be included in a rental run rate for them. We anticipate receiving $8 million in rent from HMG during 2023. For all of the other transition portfolios with market-based rents, we received $120,000 in the fourth quarter, also in line with our expectations, and expect to receive $480,000 in rent during 2023. During the year, we will work to either sell all or some of these assets or set negotiated rents. During the 2022 fourth quarter, we provided $670,000 in rent abatements to the same operator for whom we have been giving assistance. At this point, we expect to receive $300,000 in rent in 2023 from this operator. We paid $5 million in regular scheduled principal payments under our senior unsecured notes in the 2022 fourth quarter at a weighted average rate of 4.27%. We also repaid $21 million under our unsecured revolving line of credit at a weighted average rate of 5.14%, and paid $23.3 million in common dividends, as Wendy mentioned. We sold 757,400 shares of common stock for $29.2 million in net proceeds under our ATM program and used those net proceeds to temporarily pay down our revolving line of credit. We then subsequently used our line of credit to fund our investment in 12 assisted living and memory care communities in North Carolina, which will be discussed in more detail shortly. Also, we recently amended our credit agreement to update its benchmark provisions, replacing LIBOR with SOFR plus a credit spread adjustment of 10 basis points. Our only floating rate debt is our line of credit. Our balance sheet remains solid with no looming debt maturities and no secured debt. As I mentioned earlier, in the fourth quarter, we received repayment of Anthem's temporary rent reduction in the amount of $1.5 million, collecting $10.8 million from Anthem in 2022, which represents their full agreed upon rent for the year. We anticipate receiving $10.8 million in rent from Anthem again in 2023. We were active subsequent to the end of the fourth quarter, including $128 million of investments with an affiliate of an existing LTC operating partner. Clint will provide additional details shortly. Subsequent to December 31, 2022, we received $4.5 million from a mezzanine loan prepayment, which included a prepayment fee and the exit IRR totaling $190,000 related to a 136 unit independent living community in Oregon. We also received notice of intent to redeem our $13 million preferred equity investment in a joint venture to develop a 267 unit independent and assisted living community in Washington. We anticipate receiving $1.7 million of additional income in the first quarter of 2023 associated with the redemption, representing a 14% IRR. Lastly, also subsequent to December 31, 2022, we borrowed $162.7 million under our unsecured revolving line of credit, primarily for investments in 2023 and repaid $7 million in scheduled principal paydowns on our senior unsecured notes at a weighted average rate of 4.5%. Presently, we have approximately $42 million of cash on hand, $107 million available on our line of credit with $293 million outstanding, and $131 million available under our ATM. This gives us total liquidity of approximately $280 million. We have no significant long-term debt maturities over the next five years. At the end of the 2022 fourth quarter, our credit metrics remain solid with a debt to annualized adjusted EBITDA for real estate of 5 times, an annualized adjusted fixed charge coverage ratio of 4.4 times, and a debt to enterprise value of 34.2%. As with our FAD payout ratio, these metrics benefited from the non-run rate items already discussed, which represent the Anthem repayment and rent received from HMG related to prior periods. While we expect these metrics to go back up over the short term, our long-term target remains below 5 times. Now I'd like to turn things over to Clint.
Clint Malin, Co-President and CIO
Thank you, Pam. As Wendy discussed, we have been busy strengthening our portfolio, solidifying relationships with existing operators and building relationships with operators with whom we have yet to work. We are being adaptive to the marketplace by listening to operators and offering products that best suit their needs while sourcing new investments that fit our growth strategy and conservative financial management. Subsequent to the end of the first quarter, as Pam mentioned, we entered into a $121.3 million joint venture with an affiliate of a current LTC operating partner. The transaction included a $117.5 million joint venture for the purchase of 523 units across 11 assisted living and memory care communities in North Carolina. The communities are being operated under a 10-year master lease with two five-year renewal options. The initial cash yield of 7.25% increases to 7.5% in year three and then escalates thereafter based on CPI, subject to a floor of 2% and a ceiling of 4%. The lease also includes a purchase option to buy up to half of the properties at the beginning of the third lease year and the remaining properties at the beginning of the fourth lease year through the end of the sixth lease year, with an exit IRR of 9%. Purchased assets are being presented as a financing receivable on our balance sheet since the JV acquired the communities through a sale leaseback transaction, subject to a lease that contains a purchase option. We expect to record consolidated GAAP and cash interest income from those financing receivables during 2023 of $9.7 million and $8.8 million respectively. The investment also included the origination of a $10.8 million mortgage loan secured by a 45-unit memory care community located in North Carolina. The interest-only loan carries a two-year term with a rate of 7.25% and an IRR of 9%. In 2023, we expect to record GAAP and cash interest income from this loan of $943,000 and $790,000, respectively. It is interesting to note that this major regional operator has typically not utilized REIT financing, which is a testament to the deep relationship we have built with them. Within the next few days, we also expect to close a $51 million investment related to an independent living, assisted living, and memory care community in Georgia with an existing LTC partner. We will provide additional details when the transaction has closed. After closing this investment, we will have eclipsed last year's investment total early in 2023. In addition to our investments, I'd like to briefly touch on our capital recycling plan, which remains active. Last quarter, I mentioned that over the last 10 years, we have averaged approximately $35 million to $40 million per year in divestitures. In the first quarter of this year, we expect to receive net proceeds of approximately $32 million from property sales. Accordingly, we anticipate a $3 million reduction in GAAP rent. We intend to use the sale proceeds to pay down our revolving line of credit. A quick word about 2023 lease maturities. Brookdale remains within the renewal period, which ends on February 28th. We recently extended a master lease underlying two properties for an additional five years at the contractual rate provided for in the lease, and we are currently in discussions on the remainder of the expiring leases. Moving next to our portfolio numbers, with the usual caveat 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. These metrics exclude properties transitioned on or after July 1, 2021. For Q3, trailing 12-month EBITDARM and EBITDAR coverage, as reported using a 5% management fee, was 1.02 times and 0.8 times respectively for our assisted living portfolio. Excluding stimulus funds received by our operators, coverage was 0.91 times and 0.69 times respectively. For our skilled nursing portfolio, as reported, EBITDARM and EBITDAR coverage was 1.95 times and 1.49 times respectively. Excluding stimulus funds received by our operators, coverage was 1.47 times and 1.01 times respectively. I'd also like to share some recent general occupancy trends, which are as of January 31, 2023, and are for our same-store portfolio. As we previously stated, our operators give this data to us on a voluntary and expedited basis. The information we are providing today includes approximately 66% of our total same-store private pay units and approximately 90% of our same-store skilled nursing beds. Private pay occupancy was 79% at January 31, 2023 compared with 81% at September 30, 2022 and 79% at June 30, 2022. For our skilled nursing portfolio, average monthly occupancy was 73% in January 2023, the same as in September and June 2022. As a reminder, our private pay occupancy in 2019 was approximately 87% and our average skilled nursing occupancy was approximately 80%. I'll end my remarks with a brief pipeline discussion. As we've detailed today, 2022 and 2023 thus far have been very productive and our pipeline remains robust. As we move through this year, we plan to be judicious capital allocators. Currently, banks that are lending are lending at higher rates, making LTC's creative financing structures more competitive. This strategy is paying off as evidenced by a strong end to 2022, continuing into 2023. We are currently reviewing potential transactions for this year all off market totaling approximately $150 million, including the transaction I discussed that we expect to close shortly, spanning a variety of financing vehicles and property types. Now I'll give the mic back to Wendy for her closing remarks.
Wendy Simpson, Co-President and CEO
Thank you, Pam and Clint. We have substantially stepped up our investment activity and have successfully divested assets that are underperforming or are no longer core to our portfolio. 2022 was a solid year as we navigated through many challenges outside of our control. So far in 2023, we have proven our ability to put capital to work to benefit all of our stakeholders. As we continue to move through the year and beyond, we will prudently utilize our solid balance sheet to drive future growth and further strengthen our portfolio. Importantly, we will continue to deepen our relationships with strong regional operators with whom we can grow for the long term. Operator, we're ready for questions from the audience.
Operator, Operator
Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets.
Austin Wurschmidt, Analyst
I appreciate some of the detail around the 1Q guide, getting us the bridge from 4Q to 1Q. But I was curious what's holding you guys back from providing annual FFO guidance at this point?
Pam Kessler, Co-President and CFO
There's still some uncertainties that we're working through that we discussed in our prepared remarks. We would like to be able to set more permanent rent on the transition portfolio, and we're still evaluating some of those for possible sale. I think until we get more clarity on that, any guidance that we gave would be predicated on that being a certain thing, and we're just not at that point yet. So I don't see us giving annual guidance until those uncertainties are resolved, which hopefully will be later in the year. But at this point, we don't have visibility into that.
Austin Wurschmidt, Analyst
Understood. It was a little bit choppy during some of your prepared remarks and difficult to hear you. But Clint, maybe could you clarify the update you provided on the Brookdale negotiations and outcome? It sounds like you made some progress on a portion of the leases. Can you just clarify that detail and maybe remind us what portion remains outstanding and still in negotiation?
Clint Malin, Co-President and CIO
So right now, as we disclosed in our supplemental, Brookdale represents 75% of GAAP income for 2023 that has a lease renewal. The lease that we did renew represents 8% of the 2023 GAAP rent for leases that are expiring. We continuously have discussions with Brookdale. We've provided capital improvement allowances to them. Last year, we committed an additional $4 million, of which they have put to work just over $3 million to date. So we're encouraged to see continued capital improvement into the Brookdale portfolio. Their window does remain open, and they have until the end of the month to be able to exercise that renewal, which they have a unilateral right to exercise.
Wendy Simpson, Co-President and CEO
And just to clarify, Austin, that lease that was renewed, that represented the 8% that Clint was referring to, that was not Brookdale; that was another operator.
Austin Wurschmidt, Analyst
Are you still considering both Plan A and Plan B in case things don't progress with Brookdale or if part of the plan doesn't go through? What are the alternative options you have in mind?
Clint Malin, Co-President and CIO
This is our standard asset management protocol is you have lease renewals that come up, and you're always in that process of having backup plans to be able to work through. So absolutely, that's something not specific to Brookdale's portfolio; that's just something we do as an active asset management process.
Austin Wurschmidt, Analyst
From a funding perspective, you mentioned around $35 million to $40 million in annual divestitures. It seems you have one in progress to address a significant part of that, but leverage has increased slightly on a pro forma basis after the year-end. I'm interested in how you plan to finance the investment pipeline you referred to in your prepared remarks.
Wendy Simpson, Co-President and CEO
As we've said over the past years, we look to fund our acquisitions investments at 70% equity, 30% debt. And that target has not changed. I think we're ready for our next question.
Operator, Operator
Our next question comes from the line of Juan Sanabria with BMO.
Juan Sanabria, Analyst
Just curious on the transition portfolio. And correct me if I'm wrong, but it sounded like you're expecting a similar run rate from the fourth quarter cash rents received for 2023. Just curious why that isn't and why there isn't any growth there? And is that basically the senior lifestyle portfolio? If you could just give us an update on that, that would be helpful.
Wendy Simpson, Co-President and CEO
Yes, that is correct. It is the fourth quarter run rate. As I've mentioned before to Austin, we're looking at the remaining transition portfolios and determining what we're going to do if we're going to set a permanent rent or whether we're going to sell them; we haven't provided rental guidance on that portion.
Juan Sanabria, Analyst
So you're not collecting cash flows per se and that your rental income wouldn't necessarily go up if performance improves?
Wendy Simpson, Co-President and CEO
No, it's correct that we are not currently collecting rent on those transition properties. If performance improves, we would because they're market-based resets. So we would collect rent.
Clint Malin, Co-President and CIO
In 2022, there were higher expenses due to rate growth, but rate increases had not been implemented. Moving into 2023, there have been rent increases, as Wendy mentioned in her prepared remarks. We hope to see some progress throughout 2023. We will assess the portfolio during the year to determine whether it makes more sense to sell certain assets or if we can raise rents.
Juan Sanabria, Analyst
So it sounds like that could be a source of upside, but too soon to say…
Wendy Simpson, Co-President and CEO
Yes, that is correct.
Juan Sanabria, Analyst
And then just on the investment pipeline. Just curious on the $150 million kind of bucket. Is that mainly equity or is that still tilted towards debt? And what type of asset types is it favoring, and any yield color you could provide?
Clint Malin, Co-President and CIO
Right now, most of it involves some equity, but there are also loans and structured finance involved. So, it is diverse in that regard. All transactions are off-market, which is encouraging. It really depends on the type of asset. For loans or structured finance, you are likely looking at an all-in rate of around 8.5%, varying by property type, with skilled properties generally higher and assisted living a bit lower. Overall, it represents a combination of diverse investment types.
Juan Sanabria, Analyst
And then just on the tenant that's still receiving abatements, the $600,000 to $700,000. What's the latest there, how should we think about that going forward? Is that part of the disposition bucket, or any commentary around that would be helpful?
Wendy Simpson, Co-President and CEO
Currently, it's not part of the disposition bucket, and we've talked about this operator over the past 12 months. We are evaluating that portfolio. And we did give a little bit of rent guidance on it for this year. So we're still working through that.
Operator, Operator
Our next question comes from the line of Steve Valiquette with Barclays.
Unidentified Analyst, Analyst
This is Amin Jacare on for Steve Valiquette. Could you provide any additional insights on potential acquisitions for the rest of the year and your perspective on that in light of the current interest rate environment?
Clint Malin, Co-President and CIO
We believe that in the current interest rate environment, banks that are lending are doing so at higher rates and lower loan-to-value ratios. This situation makes LTC more competitive in the market. Additionally, since we don’t use property-specific debt, our financing through REITs offers a greater certainty of closing. We see this environment as an opportunity to pursue acquisitions. While we are optimistic about what we observe in 2023, we will remain disciplined in our approach. We feel fortunate to have already surpassed our investment amounts from 2022, and we anticipate further opportunities for LTC.
Operator, Operator
Our next question comes from the line of Rich Anderson with SMBC.
Rich Anderson, Analyst
So let's see if I can help you with the 2023 guidance here. So you take the first quarter and you annualize it, that's $2.70. You mentioned transition, and I appreciate and respect the reason why you want to hold off, but it seems like there's more potential upside than downside from that portfolio. Perhaps you sell it, and maybe there's some dilution there, but more likely, you redeploy that. So isn't $2.70 kind of a floor type of number if you think of the run rate from first quarter? And there's probably through your acquisition pipeline upside from that. Is that a reasonable way to look at it, or am I missing something?
Wendy Simpson, Co-President and CEO
I would say that's reasonable.
Richard Anderson, Analyst
I'm not trying to put you on the spot. Can you go ahead and answer the next question?
Wendy Simpson, Co-President and CEO
You reverse engineer and we want to achieve our 80% dividend coverage. Our dividend is $0.13 a month and $0.11 a month.
Richard Anderson, Analyst
What's $0.09? I see. So you take the dividend, you targeted an 80% payout, and you can look at the number from two different angles, is that correct?
Wendy Simpson, Co-President and CEO
At this point, in reality, that's right.
Richard Anderson, Analyst
Second question is on the joint venture. Clint, you said something about the purchase option. Did I hear you right that they were somehow inherited or were they negotiated into this transaction?
Clint Malin, Co-President and CIO
They were negotiated as part of the transaction.
Richard Anderson, Analyst
I thought that was the case. So the reason why I'm bringing it up is LTC finds itself in potentially a better competitive position for the reasons you mentioned in terms of bank lending and so on. Do you feel like purchase options as a negotiating tool maybe starts to wither away a little bit for you guys, or I'm curious as to why it was still presented itself here considering kind of the position of strength that you're coming from, from a negotiating perspective?
Clint Malin, Co-President and CIO
I mean, obviously, our preference would be not to include purchase options. But in looking at each individual transaction, we have to look at the circumstance and what the specific deal is. This deal is obviously negotiated in 2022. The lending environment has continued to evolve and change since then, but it's really working with operating partners and what they want to achieve out of this. In this case, purchase options and the ones we did last year made sense for that specific operator. Our intent is to build these relationships, grow them and lead into additional investments beyond this. So if we can provide flexibility in how we're approaching these investments, we think it gets solid growth for future business for those operators.
Richard Anderson, Analyst
Is there anything more beyond the joint venture and the mortgage with this operator that is upside that you see in terms of a relationship here, either with them or maybe just in the state of North Carolina?
Clint Malin, Co-President and CIO
I mean we do see the potential of more business. Although as we're growing and increasing concentration, we're also cognizant of that with any individual operator. So we'll manage that. But I do think that we have the ability to do additional investments, not obviously as large as this investment. But yes, I think we have the opportunity to do more.
Operator, Operator
Our next question comes from the line of Michael Carroll with RBC.
Michael Carroll, Analyst
I just have a few clarifications. So the skilled nursing facility lease that was renewed. Is it fair to assume that the contractual cash rent is the same on that renewal?
Wendy Simpson, Co-President and CEO
I think it was a 2.5% increase, which was whatever the stated increase was, which generally is about 2.5%.
Michael Carroll, Analyst
And does the GAAP rent on that change, given that now you have a five-year renewal or are you straight-lining out over the next five years compared to the prior lease, or is it unchanged?
Wendy Simpson, Co-President and CEO
Yes, they are straight lined. So it would increase. It's going to reset for five years. So yes, that's the math.
Michael Carroll, Analyst
And then related to Anthem. I know we've been kind of on the same rental rate for them. I mean are we getting closer to setting a new contractual rent from them or is there still a potential upside from this current level?
Clint Malin, Co-President and CIO
We would like to go ahead and set contractual rents, as I'm sure Anthem would at some point. But at this point of where we're at, we'll see where 2023 goes, but that is our objective as well as Anthem to get into that actual contractual rental amount. When we do that, that will still to be determined, but it is a goal on both parties' parts to be able to do that.
Michael Carroll, Analyst
Is that more of like a 2024 event as you kind of hit more of a stabilized type of environment?
Clint Malin, Co-President and CIO
I mean realistically, probably yes. At this point, I'd say probably early '24...
Michael Carroll, Analyst
And then related to HMG, I mean, that $8 million that you expect to be paid, is that based off of their current performance? I mean, is there upside to that potential number if they perform better than you expect or they expect?
Clint Malin, Co-President and CIO
We do have a structure where we have market-based resets. Given that, working with HMG and their budgets, this is a number that we were both comfortable with looking forward as to what it could be, but we do have the ability to reset rents contractually based on the market-based reset. Our goal is to put this into a longer-term lease and set permanent rents.
Michael Carroll, Analyst
How have the operations of those assets done since HMG has kind of taken over? And how long does it take for that to kind of fully stabilize given that they've been able to put in their processes and kind of turn around overall results?
Clint Malin, Co-President and CIO
It's taken longer than both parties expected since the initial transition. However, a lot of work has been done in terms of capital improvements, staffing, and leadership. We are approaching the 24-month mark this October, which provides them with the time needed to establish their processes. They now have a platform to enhance operations and manage expenses effectively. With the implemented capital improvements, we hope to see continued advancements. A significant part of this also involves building relationships with hospitals and managed care providers to facilitate our growth. In Texas, there is ongoing discussion about a rate increase in the legislature, and while everyone is optimistic, we won't have clarity until the session concludes in mid to late May.
Wendy Simpson, Co-President and CEO
And that's not included in our projections.
Clint Malin, Co-President and CIO
Correct.
Operator, Operator
Our next question comes from the line of Tayo Okusanya with Credit Suisse.
Tayo Okusanya, Analyst
Kind of fortunate to be on the call right now, because you guys just mentioned Texas. Just kind of curious, again, how things are shaping up at this point, if there's any insight? And second of all, if there are any other states that you have exposure to that you would consider an increase in Medicaid rates this year, absolutely critical for the success of the operators that are in the state?
Clint Malin, Co-President and CIO
As for the states where we have a significant presence in skilled nursing, Texas and Michigan are key locations. We just discussed Texas, and Michigan is currently undergoing a rebasing process. Our operator in Michigan anticipates about a 9% rate increase in October, which will be retroactive due to the rebasing of the cost reports. This will provide a significant benefit starting in October. Regarding Florida, we recently renewed leases for two skilled nursing facilities there, which had a substantial rate increase last year. That adjustment has already been implemented.
Tayo Okusanya, Analyst
While your portfolio is in great shape, how do you feel about the skilled nursing sector and its future? Are you concerned about the issues faced by Omega and its top tenants? Do you anticipate more short-term challenges before conditions improve? Do you think there has been a turning point in the skilled nursing area? I'm interested in your overall perspective on the industry at this moment.
Clint Malin, Co-President and CIO
I think it depends on what portion of skilled nursing you're referring to. Right now, census and long-term care has been more challenged than it has been in shorter stays. In skilled nursing, taking on higher acuity patients, especially now with the implementation of PDPM, that's been beneficial to the industry through the pandemic. I think you see reaching up into higher acuity is where a lot of operators are going. That's reflective of the investments we made last year, both with Ignite Medical Resorts as well as Pruitt in Florida. Operators are focusing on that higher acuity model and being able to take on patients that are in hospitals or other higher acuity settings. We think that has traction. The long-term care side has been more challenged with home care and assisted living Medicaid waiver programs.
Operator, Operator
Our next question is a follow-up question from Juan Sanabria with BMO.
Juan Sanabria, Analyst
Just a couple of follow-up questions. Is there any back story to the Florida impairment we should be aware of, is that tenant paying rent, or what's the story there?
Clint Malin, Co-President and CIO
That was a building that was part of a transition portfolio that we did last year. It was a one-off building from the others in that portfolio. So really just identifying buyers for that asset and the impairment was a result of that. So nothing other than that.
Juan Sanabria, Analyst
And then you mentioned $32 million of dispositions. Were those rent paying, or what was the rent that was booked in the fourth quarter as it relates to that $32 million dispo opportunity?
Wendy Simpson, Co-President and CEO
Juan, it was very hard to hear. Would you mind repeating the question?
Juan Sanabria, Analyst
The $32 million of dispositions you referenced, I think, in your prepared remarks. What kind of yield should we expect relative to what was booked in the fourth quarter…
Wendy Simpson, Co-President and CEO
We said there would be a $3 million GAAP decrease in rent due to the sales. Is that your question?
Juan Sanabria, Analyst
I guess is that a full-year '23 number or fourth-quarter annualized?
Wendy Simpson, Co-President and CEO
That was a full '23 number. So just pull that out of your model.
Juan Sanabria, Analyst
And then just the last one, this one's maybe a little harder. But on the occupancy front, you gave the numbers for January for both SNFs and seniors housing. Why haven't those really improved over the last six plus months, what do you think the issue is?
Wendy Simpson, Co-President and CEO
You can't generalize everything, and the increases in occupancy after the pandemic have not followed a straight path. There have been some short-term challenges. The reasons for this vary. Some communities are experiencing leadership changes, we are facing staffing challenges, and there is also the impact of seasonality. In senior housing particularly, occupancy tends to drop in the fourth quarter and at the start of the first quarter, as families are often hesitant to make changes during the holiday season. Typically, we see an increase in occupancy after the first quarter, and we hope that trend will continue. However, we still need to recover 700 to 800 basis points to return to pre-pandemic occupancy levels. I anticipate that the recovery will not be smooth, and it will be a challenging journey. We are evaluating our portfolio carefully. If we believe the short-term issues are temporary and can be resolved, we will keep our investments in those areas. If we determine that the market has shifted or if demographic trends or market conditions do not support the product, we may consider exiting those investments.
Clint Malin, Co-President and CIO
We've received feedback from some operators, which varies by market and state. Overall, lead generation has been quite strong. However, in certain markets, the conversion rates have been slower than expected. It's important to understand the reasons behind this lag in sales conversions. The good news is that lead generation remains robust, and I've noticed similar reports from other earnings calls this quarter, indicating that lead generation is consistently strong. Operators will concentrate on improving the conversion into sales.
Operator, Operator
Thank you for your question. There are no further questions waiting at this time.
Wendy Simpson, Co-President and CEO
Thank you, everyone, for joining us. We look forward to talking to you very shortly as the first quarter is close to closing. Have a great day. Bye-bye.
Operator, Operator
This concludes today's LTC Properties Incorporated Analyst and Investor Call. Thank you for your participation. You may now disconnect your lines.