Clint Malin: 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: Our next question comes from the line of Michael Carroll with RBC.
Michael Carroll: 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: I think it was a 2.5% increase contractual increase, it was whatever the stated increase was, which generally is about 2.5%.
Michael Carroll: 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: 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: 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: 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: Is that more of like a 2024 event as you kind of hit more of a stabilized type of environment?
Clint Malin: I mean realistically, probably yes. At this point, I’d say probably early ’24
Michael Carroll: 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: We do have a structure where we have market based resets. And 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. But also, it is a goal between us and HMG because this is a shorter term lease right now to roll this into a longer duration lease and set rents permanently. So that’s something that we will be active or in active discussions with HMG to accomplish that, or if we stay in the current market based rent structure, there is a possibility that could increase over time. But really, our goal is to put this into a longer term lease and set permanent rents.
Michael Carroll: How has 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: I mean, it’s definitely taken longer. I think that both parties expected from when we initially transitioned. But I mean, they’ve done a lot of work as far as doing capital improvements, working on staffing, leadership. So at this point, we’ll be coming near the 24 month mark this October, which is really giving them the runway to be able to put their processes in place. So I think at this point, they’ve got the platform to be able to improve operations and rightsize expenses. And with the capital improvements, hopefully, be able to continue to make improvements. A lot of this also is just working on relationships with hospitals and managed care providers as well to be able to grow us into. And then we have — the rate increase in Texas that’s being discussed in the legislature right now, that is still — I think the session ends probably at mid to end of May.
And so we’ll have to see where that rate increase or if a rate increase comes about, everyone is hopeful that will happen in Texas, but we won’t know for certain until the legislative session ends and as said, mid-May till the end of May.
Wendy Simpson: And that’s not included in our projections.
Clint Malin: Correct.
Wendy Simpson: That would be an upside.
Operator: Our next question comes from the line of Tayo Okusanya with Credit Suisse.
Tayo Okusanya: 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: Well, as far as states — I mean, states for LTC that have — we have a large concentration of skilled nursing is Texas and Michigan. So we just talked about Texas. Michigan is going through a rebasing process. So there will be a positive increase in rates for our operator in Michigan, they’re expecting probably about 9% rate increase in October that would be retroactive as well, given the rebasing of the cost reports. So there’s a big benefit and plus in Michigan starting in October of this year. actually the point to Florida, which is the lease that we just renewed was two skilled nursing buildings in Florida, which had a large rate increase that took place last year. So that already occurred.
