Clint Malin: We’ve given them effectively a 2.5-year runway to improve operations, occupancy, improve margins. So what they’re doing is, they are paying us 8.5% current pay from cash flow generated from the portfolio. And as they get retroactive funds, they provide those to us to increase the security. And starting in 2025, incremental to the retroactive Medicaid funds, we get 50% of the excess cash flow. So as the buildings perform better, we contribute. We also participate in the cash flow through that mechanism. So as operations improve, we have less draws on our security.
Rich Anderson: Okay. Great. And then on the run rate, the 63 to 64, excluding the non-recurring rent, would you call that a kind of a floor to the year? Is there any reason why that might trickle down from here for whatever reason? Maybe through ATM draws or whatever temporarily speaking? Or do you see this as sort of like a jumping off point and likely to see more of a quarterly sequential ramp from that level?
PamKessler: Yes. I think it’s probably more of a floor than a run rate for the year but that remains to be seen. I mean we’re very bullish on the investment outlook for the year. So that would add to it. We give a base case scenario given no additional investments. So anything above what we have right now would be accretive, even overequitizing.
Rich Anderson: If you assume zero future acquisitions, it still trickles up, right, through escalations and so on?
PamKessler: It does. That is correct. Yes. And those hit more in the back half of the year, yes.
Rich Anderson: But there’s nothing sort of sinisterly behind the scenes that’s waiting to lower that number for one reason or another, nothing kind of one-time-ish that you see coming. It’s basically a pretty good visible path from this point going forward.
PamKessler: Yes, correct. Our crystal ball right now does not have anything looming out there.
Operator: Your next question for today is coming from Michael Carroll with RBC.
Michael Carroll: I wanted to circle back to HMG. Just to confirm, the rest of the portfolio, minus those two assets, that they are happy with and how it fits within their geographic footprint, and they want to keep those properties going forward once you kind of figure out what to do with those other two properties?
Clint Malin: Correct. Yes. I mean, they’ve identified these two buildings. They are cash flow positive. So we’re in discussion with them on how we approach those two, but they have approached us about possibility of transitioning to. But again, two collectively are cash flow positive.
Michael Carroll: And then once those two get transitioned away, would you be in a position to create a longer-term lease with HMG? Or are you still waiting for that portfolio to recover before you set a longer-term lease with more of a permanent rental rate?
Clint Malin: Yes. We think there’s more upside in occupancy and performance. So we definitely feel there’s more room for growth. So we want to participate in that.
Michael Carroll: And then, how are those assets performing? I know that they took over those, was it early 2023 when they took those over? I guess how have they recovered since they’ve been operating them?
Clint Malin: It was in ’21 after they took over. Occupancy has been fairly flat, but they’ve improved. Labor agency utilization has gone down. So cash flow has improved but occupancy has been a little bit flat. So that’s really where we see the potential for growth is occupancy gains.
Michael Carroll: Okay. And I know that I mean, I guess, SEC’s contractual rent was significantly higher. I mean, when you kind of set a new rate, is it going to be closer to that $14 million, $15 million run rate? Or is it going to be closer to this $8 million run rate?
Clint Malin: Somewhere in between. I don’t think you’re going to get all the way back to the 14 and 8.
Michael Carroll: Okay. And then just last one for me on investments. I know you kind of touched on this a little bit. So what on the investment side, are you looking at more intently right now? And it sounded like you’re more interested on the loans. Is that correct? Are you seeing a lot of different opportunities in the real estate too?
Clint Malin: I think a lot of different opportunities. I think that people we’re speaking to are looking to work with stable capital providers. And so for us, it’s going to be looking at loans, mezz, preferred equity, joint ventures, acquisitions and triple net. So a little bit of everything. So I think we’re going to be considering and looking at a lot of opportunities.
Operator: Your next question for today is coming from Connor Siversky with Wells Fargo.
Connor Siversky: Most of my questions have kind of been asked at this point. Can you quickly go over what you’re seeing in the watch list? It seems like ALG was a unique situation given COVID. You seem to be like you guys are pretty comfortable with the level of visibility you have with them, the way you structured that contract, and the anticipated Medicaid rate increases you restructured that for. What else are you seeing out there just in the portfolio?
Clint Malin: I mean we brought resolution to a lot of items. The Brookdale lease transition, Prestige, we’re working through the ALG transition, and we spoke about HMG. So those are our main focuses, and we’re talking about growth. So I think that is a positive aspect of where we are at in our focuses. And also in the transition portfolio, we’re seeing upward movement in recovering rental income. So those are all positives.
