Strawberry: Indiana 2 Is Fully Leased and Rent Coverage Rests on UPL
Indiana 2 shows 100% contractual occupancy and a $147.1 million value in the quarterly property disclosure. The JLL appraisal separates the coverage: 1.34 including UPL and only 0.37 without Medicaid supplemental payments, making the valuation depend on the durability of Indiana's reimbursement layer.
At Indiana 2, the simple figure of 100% contractual occupancy does not mean the tenant covers rent from its ordinary operating base. Strawberry presents a $147.1 million value for the portfolio, down from $150.3 million, and the JLL appraisal shows what supports that value: annual rent of $15.4 million is covered at 1.34 only when UPL, Medicaid supplemental payments, are included. Without those payments, the coverage ratio falls to 0.37. That gap matters more than a modest valuation update, because in healthcare real estate under NNN leases, value depends on the tenant's ability to keep paying over time, not only on the existence of a lease. Indiana is gradually moving the UPL program into a new mechanism through 2027, and JLL notes that the exact facility-level impact is uncertain. The Indiana 2 read therefore has to move from contractual occupancy and stated rent to a more practical question: how much of the coverage layer comes from a regulatory reimbursement stream that lenders themselves price at higher risk. The next proof point is whether Indiana 2 coverage stays stable after the 2026 and 2027 phases of the UPL transition.
100% Contractual Occupancy Does Not Mean the Tenant Covers Rent
The quarterly material-property disclosure presents Indiana 2 as fully leased: 100% average occupancy, a $147.1 million value, $12.2 million of NOI used for an 8.3% yield, and average rent of $1.56 per square foot per month. That is the owner layer: whether the lease exists, whether the tenant is in place, and what value the appraiser assigns to the contractual interest.
The operator layer looks different. The JLL appraisal covers 19 The Waters properties in Indiana, 1,821 operating beds, and 801.6 thousand square feet. Operating occupancy at the valuation date is 56.0%, and the stabilized forecast is 56.3%. That does not contradict the 100% figure in Strawberry's table. It explains it: the portfolio is fully leased for the property owner, while the tenant still has to generate enough healthcare activity to support rent.
In an NNN lease, where the tenant pays property expenses and the owner bears almost no operating cost, tenant coverage is the central valuation point. JLL states that healthcare real estate investors assess rent through a coverage ratio, meaning tenant NOI or EBITDAR relative to rent. The minimum market ratio cited in the appraisal is 1.2. Indiana 2 is above that threshold only when UPL is included in tenant income.
Without UPL, Coverage Drops to 0.37
The number that separates a strong lease from a lease dependent on government reimbursement is 0.37. JLL estimates tenant effective gross income of $130.3 million, operating expenses of $109.7 million, and NOI of $20.6 million. Against rent of $15.4 million, that creates 1.34 coverage. The income statement includes roughly $15.0 million of Other Income, and JLL states that UPL is included in that line.
When UPL is removed, the same coverage ratio falls to only 0.37. This is not a small appraisal caveat. It means the operating base without the reimbursement layer does not cover representative rent. The gap between 1.34 and 0.37 is equivalent to almost $15 million of annual support to tenant NOI relative to rent, so UPL is not regulatory background. It is a component that supports the payment to the property owner.
This does not mean the tenant is about to stop paying. The appraisal assumes the tenant will exercise extension options because the terms are favorable to the tenant, and the lease leaves no expenses with the owner. It does change the quality of the valuation read: full contractual occupancy and rising rent are not enough on their own if the source of coverage depends on a reimbursement layer outside the property owner's control.
Value Fell Even Though Rent Increased
The JLL appraisal shows a non-intuitive move: Year 1 contractual rent increased from $15.0 million to $15.4 million, while value declined to $147.1 million. The reason is not simple lease weakness. Stabilized coverage fell from 1.51 to 1.34, while the capitalization rate, yield rate, and terminal capitalization rate increased to 10.50%, 13.00%, and 11.25%, respectively.
In healthcare income real estate, this is where the cost of higher rent becomes visible. The tenant pays more to the owner, but its coverage has already declined. The market requires a higher return, so the rent increase does not automatically translate into a higher value. When that coverage relies on UPL, higher rent increases the importance of reimbursement stability instead of reducing it.
The unusual point is not the use of Medicaid or supplemental payments by itself. U.S. nursing home tenants operate inside government reimbursement systems, and UPL can be part of the normal model. What is unusual at Indiana 2 is the quantification: coverage above the market threshold including UPL, and far below 1.0 without it. That is the difference between routine sector risk and a dependency that decides the valuation.
Indiana's Transition Raises the Price of Certainty
Indiana is changing the UPL program gradually from July 1, 2024. The model moves from a mix where 90% is based on the Legacy System and 10% on the Pooled Supplemental Program, to 40% pooled in 2025, 70% in 2026, and 100% in 2027. JLL notes that the exact impact on UPL revenue at the facility level is uncertain, because the system is changing together with facility-specific Medicaid rates.
The financing market also treats this layer differently. JLL states that lenders place higher risk on UPL, and that 2026 HUD guidance requires UPL revenue to be valued at a capitalization rate of at least 25%, compared with fee-simple capitalization rates of 11.0% to 13.0% in Indiana. REITs and private equity still treat UPL as normalized cash flow, which explains why the value can hold while remaining sensitive to regulatory change.
Indiana 2 is not a contractual occupancy problem. It is a rent-coverage quality problem. As long as UPL keeps coverage around 1.34, the $147.1 million value rests on a mechanism the market can underwrite. If Indiana's transition reduces reimbursement at the portfolio level, the full lease by itself will not solve the gap, because coverage without UPL is already 0.37. The next filings should put special weight on tenant income, lease coverage, and any change in disclosure around Indiana UPL.
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