CareTrust REIT's (CTRE) CEO Greg Stapley on Q4 2015 Results - Earnings Call Transcript

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CareTrust REIT (NASDAQ:CTRE) Q4 2015 Results Earnings Conference Call February 12, 2016 11:00 AM ET


Greg Stapley - Chairman and CEO

Bill Wagner - CFO

Dave Sedgwick - VP Operations

Mark Lamb - Director of Investments


Paul Morgan - Canaccord

John Kim - BMO Capital Market

Chad Vanacore - Stephens

Jonathan Hughes - Raymond James

George Clark - RBC

Duncan Brown - Wells Fargo


Welcome to CareTrust REIT's Yearend 2015 Earnings Call.

Listeners are advised that any forward-looking statements made on today's call are based on management's current expectations, assumptions and beliefs about CareTrust's business and the environment in which it operates. These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financings and any other matters, all of which are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied here.

Listeners should not place undue reliance on forward-looking statements and are encouraged to review the company's SEC filings for a more complete discussion of factors that could impact results as well as any financial or other statistical information required by SEC Regulation G.

In addition CareTrust supplements its GAAP reporting with non-GAAP metrics such as EBITDA, adjusted EBITDA, FFO, normalized FFO, FAD and normalized FAD.

When viewed together with this GAAP results, the company believe that these measures can provide a more complete understanding of its business but they should not be relied upon for the exclusion of GAAP reports.

Except as required by federal securities laws, CareTrust and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, change in circumstances or for any other reasons.

Listeners are also advised that the company filed its 10-K for the 2015 and any accompanying press release yesterday. Both can be accessed on the Investor Relation section of CareTrust's website at A replay of this call will also be available on the website.

At this time, I would like to turn the call over to Mr. Greg Stapley, CareTrust Chairman and CEO.

Greg Stapley

Thanks, Kevin. Good morning everybody and thank you for joining us today. With me on the call today are Bill Wagner, our Chief Financial Officer; Dave Sedgwick, our Vice President of Operations; and Mark Lamb, our Director of Investments.

We want to keep this fairly brief and mostly just give you some color on our quarter and the business climate we see in general for the numbers and other details, we of course encourage you to look to the K and our press release from yesterday.

Q4 was a breakout quarter for CareTrust. On October 1, we closed the $177 million Liberty Pristine deal with it's going in cash deal of over 9.5%. That closing fielded another piece of the puzzle for us, which began with the conversion of our old revolver from $150 million secured line to $300 million unsecured line and continued with our first real equity offering, which raised roughly $160 million in the substantial transformation of our balance sheet.

Since then we’ve used that platform and liquidity to continue pushing on the fly wheel and we've just upsized our unsecured revolver to $400 million with another $250 million accordion if we needed.

We’ve replaced almost $100 million of previously non-pre-payable high interest rate legacy secured term debt with $100 million of low rate seven-year unsecured term debt, which will drop around $1.3 million to our bottom line this year. Then we closed additional deals of high going and lease yields that we expect and provide superior returns for years to come.

I am once again pleased to report these results have cater-pulled us toward our long term goal well ahead of schedule slicing us in position of real strength in the coming year despite the choppy markets.

In fact in January, we boosted our existing shelf registration to $750 million in order to facilitate both our long term or long planned at the market program and to leave plenty of room to raise additional equity capital for growth if we needed and market conditions allow.

So while we have no immediate plan to sell equity in the current market we will be ready if as and when prudence in pricing dictate.

We certainly have no shortage of superior acquisition opportunities and our expanded liquidity coupled with a steadily increasing pool of quality targets is allowing us to both be high selective and depressed pricing as we initiate new deals on what has started to look -- like more of a buyer's market for 2016.

With the new tenant relationships and investments we’ve made to date, we’re now generating over $84 million in annual run rate rental revenue. This represents a 51% increase from the $56 million in annual rental revenues we started with just 20 months ago.

With our growth and balance sheet improvements, we've also received upgrades in our credit outlooks from both Moody's and Standard & Poor's in recent months and we hope to improve our credit ratings with them in the near term.

And our dividend remains one of the best covered if not the best covered in the space at 62% of FED, which leaves us around $22 million to $24 million in pre-cash flow each year to redeploy in order to move returns further while strengthening the balance sheet even more.

So with all that, we remain optimistic about CareTrust future. All the REITs been hit in the current market. We're excited about the fact that our banks have shown great support for our credit, our investors have shown consistent interest in our equity and at our size, we really don’t have to raise equity or chase mega deals in order to move to needle significantly in 2016.

With that, I’ll turn it over to Dave to briefly talk about our recent deals, then Mark to discuss the pipeline and finally to Bill to discuss the financials. Dave?

Dave Sedgwick

Thank, Greg. Let me just open my part by congratulating our primary tenant Ensign and another record year and quarter. Ensign is now down to 64% of our run rate revenue and we're pleased to have their solid leases, which cover at more than 2.05 times of the facility level of EBITDAR.

We remain especially impressed with how they're leading the way on adapting to the ever changing reimbursement environment and using the current evolution toward more managed care and other value based payment systems to capture market share and improve patient outcomes.

We continue to be the standard for us as we seek and evaluate other great tenants to operate our growing portfolio at healthcare assets. As experienced operators ourselves, we focus on partnering with people who combine their requisite sophistication with the culture that translates into exceptional employee and patient experience.

Most recently we found that combination with both Pristine Senior Living in Ohio and Trillium Healthcare in Iowa. Pristine took over operations for our Liberty acquisition at the start of Q4 2015. They’ve invested in people and processes and in a very short time exceeded our expectation.

For example anecdotally, Pristine reports that their Medicare sense is at almost 60% since the takeover. The first several department of health surveys have been superior to state averages as well and they still have a lot of room to grow overall centers and skilled mix.

We could not be happier with how this partnership is taking off and are presently pursuing additional acquisitions to further strengthen Pristine’s master lease with us.

On February 1, we expanded our existing Trillium Healthcare master lease by purchasing nine skilled nursing facilities in Iowa for a long time -- from a long time operator who is retiring from the business and installing Trillium as the new operator.

This $32.7 million investment provides Trillium with additional scale and a healthy cash flow to continue to fuel their growth plan. They view us with a strong 143 times lease coverage and a 9.76% going in cash yield and like Pristine, we continue to leverage additional opportunities to grow with Trillium.

We continue to carefully evaluate and stay close to our tenants especially on its skilled nursing side making sure they're sophisticated, engaged and staying abreast with the changes in reimbursement and other market dynamics is critical to their long-term health and the long-term wellbeing of our portfolio. Both we and our operators are well attuned to the evolutionary changes occurring even now.

Accounting Care Organization's Medicare advantage and other value-based payment systems such as current bundled payment cost initiatives or BPCI pilot company’s comprehensive care for joint replacement pilot also known as CJR are all having predictable impacts particularly on operators that may not be well equipped to timely adjust to the changing landscape.

Long anticipating the impact of these changes we've been carefully partnering only with the operators who are a nimble decentralized and looking to gain advantage from such changes.

So far this is paying us as our quality skilled nursing tenants appear to be quite healthy and are scaling smartly against the headwinds that appear to be rocking some other votes.

Mark will now give some color on our finance.

Mark Lamb

Thanks Dave and hello everyone. As Greg mentioned we have solid acquisition targets in the pipeline. While we're always looking at dozens of opportunities, at present we're in serious negotiations for approximately $100 million of quality assets.

As you know our core strategy is to stream the other steady stream of relatively small deals at attractive yield to produce big results over time. We're excited to not only tack on some of these deals to our existing tenant base and strengthen our in-place master leases, we're equally excited to commence new relationships with great operators who understand what it takes to succeed in today’s ever changing healthcare environment.

Earlier Dave touched on CJR and BPCI business, we're cognizant of these issues as well as continued on our supply concerns with senior housing space.

So in addition to partnering with sophisticated nimble operators who embrace the dynamic reimbursement environment, since December we've adjusted our underwritings to reflect what we believe are the right risk adjusted ranking yields and necessary lease coverages to address rising cost of capital and allow our tenants some additional runway.

Evaluating skilled nursing assets, our hurdle rates for going in lease yields are now generally pegged in the high 9% to low 10% range and coverage is in the 135 to 145 range, all are asset specific

On the senior housing side we continue to look for assets with quality physical plans that target a mid-market consumer and secondary and tertiary markets that are similar insulated from the uptick in development that is primarily taking place in major metro markets. For these we've increased our required going in yields to high 8% and 9% range with minimal lease coverage of 1.2 times.

Our investment philosophy focuses on stabilized assets rather than pure turnaround, prohibit overpaying for assets that have nowhere to go but down. We much rather invest in a stabilized assets that's got wholesome remaining upside and some margins for operating there and then put adequate lease coverage on that to protect our midstream long-term, that coupled with quality tenant selection is what has driven the growth in lease coverage on virtually all of our assets today even though about a third of our run rate revenues come from assets that have been in the portfolio for less than 15 months.

The guidance to close, first let me mention that our preferred equity investment in our Denver Area Assisted Living and Memory Care campus is on track to come online in Q2 and first deposits are coming in now as construction is ramping up.

Second as Dave discussed we've seen great progress at Pristine since the Liberty acquisition in October. We're happy to report that they and all of our tenants have exceeded our underwriting expectations and are in great shape from at least coverage perspective.

And we're staying close to all of them to be sure that they're managing the evolutionary changes on the horizon that are ready to take advantage of the opportunities they will present.

Finally for the record, as we speak to you today CareTrust has a 132 properties in 15 states and we're actively working with a variety of brokers, seller and operators to source additional opportunities for address.

And with that, I’ll hand it to Bill.

Bill Wagner

Thanks, Mark and good morning to everyone. For the quarter we're pleased to report that normalized FFOs grew by 94% over the prior year quarter to $12 million and normalized FAD grew by 88% to $13 million and just a little further color on Q4 over Q4 earnings.

As you'll recall in December of last year we paid our purging distribution, which consisted of approximately $33 million in cash and $9 million in shares. Unlike the spin shares, which were retroactively applied to prior periods, the purging distribution shares were not, but they were going to have to be paid regardless. So viewing the quarters is those shares that have been outstanding for all of Q4 last year.

FFO per share would have been $0.19 in Q4 last year compared to $0.25 in Q4 this year an increase of 36% and FAD per share would have been $0.21 in Q4 last year compared to $0.27 in Q4 this year, an increase of 32%.

Now on to our 2016 guidance, in our press release schedules we have supplied guidance on a net income to FFO and FAD reconciliation on a per diluted share basis. We are projecting normalized FFO per share for 2016 to be between a $1.05 and $1.07 and FAD per share to be between $1.15 and $1.17.

Included in this guidance are the following assumptions; there are no new investments included beyond those made today nor is any new debt or stock issuance contemplated beyond the new debt we’ve already disclosed.

There are no CPI bumps factored in any of our leases. A couple of our leases have just celebrated their first anniversary and the increases were immaterial to say the least and we're not sure this dynamic will change through the coming year.

So the on-time rents are included in our guidance at $56 million, Pristine is at $17 million and total rental revenues for the year are projected at approximately $84 million, which includes the two most recently announced.

Unless some modest inflations starts to come back soon, scheduled CPI rent increases for our tenants this year could be flat to minimal. Our three independent living facilities are projected to roughly the same as last year or about 200,000 in NOI.

Interest income is expected to be approximately $400,000 down from $900,000 in 2015 because the accounting rules limit the amount that we can recognize on our preferred equity investment and this caps out in 2016.

We stop accruing interest income around mid-year, but the contract interest will continue to run and we expect to recover it all when the asset is stabilized and sold.

As a reminder, we have the option to buy this asset with an outstanding tenant in place on a fixed price formula to stabilization at a discount to market. Interest expense is expected to be approximately $24.3 million and includes a $330,000 write-off of deferred financing fees associated with the recent payoff of the GE debt.

In our calculations we've assumed a LIBOR base rate of 1% that plus the LIBOR and margin rate of 185 bps on the revolver and 205 bps on the new seven-year term loan make up the floating rates on our revolver and term loan.

Interest expense also includes roughly $2.3 million of amortization of deferred financing fees. G&A is projected to be between $9 million and $10 million, which equates to just under 10% to just over 10% of total revenues. G&A also includes roughly $2.6 million of amortization of stock comp.

G&A should vary some in 2016 if we're required to comply with Section 404 of the Sarbanes-Oxley Act and to the extent we grow and add a couple of FTEs. Otherwise the spikes that we saw in late 2014 in the back half of 2015 should begin to flat.

As for our credit stats in relation to the numbers just discussed, our debt-to-EBITDA is approximately 5.7 times today, leverage is about 48% of enterprise value and our fixed charge coverage ratio is approximately 3.6 times. We also have about $18 million cash on hand.

Lastly, our tenant concentration with Ensign is now down to 64% of revenues although I must always remind you that we're very bullish on them as an operator and a tenant and we continue to love their 2.0 times plus lease coverage.

Each of these credit metrics continues to exceed that what could change our rating up hurdles and the credit opinion we received from Moody’s in 2014. With the newly amended credit facility, we have even more runway to fund our growth in 2016.

And with that, I will turn it back to Greg.

Greg Stapley

Thanks Bill. Well to wrap up, we’re excited about the trajectory we’re on. We have a solid and growing rent stream and an enviable portfolio with the true best-in-class tenants and several best-in-class tenants and abundant opportunities to grow.

We hope this discussion has been helpful. We're obviously excited about both our near-term and long-term prospects and we're grateful for your continued interest and support.

And with that, we will be happy to answer questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Paul Morgan with Canaccord.

Paul Morgan

Hi good morning.

Bill Wagner

Good morning.

Paul Morgan

You mentioned your shift in underwriting in terms of cap rates and EBITDA coverage and I’m just wondering as you’re out in the market looking at transitions, are you finding it tougher to nail down deals if it's something that will be ten handle on skilled asset with 1.4 coverage. Does that going to make it a little bit more difficult or how is the market versus where you’re now?

Bill Wagner

I think the skilled nursing market is still in particular pockets is pretty hot and so we’re -- we continue to look for kind of the one-Zs, two-Zs. The transaction we closed in Iowa was a piece of our portfolio and that specifically was a scenario where we weren’t the highest bid, but we were the certainty of close if you will.

The seller knew that we were going to be able to perform. They knew that our tenant was real and so they took certainty and they took less proceeds. So I think certain markets throughout the country there is still fairly hard on the SNF side, but as we kind of look for one-Zs, two-Zs with a good thought of Medicaid base we’re particular in terms of looking for those types of assets that our tenants can grow their coverage of.

So we're seeing opportunities, but for the most part we're pretty particular about finding those types of assets and so we’re looking at a lot and out there -- you just have to dig in and continue to have conversations with the brokerage community as well as other operators because even our operators are bringing the deals to us.

Paul Morgan

And how are you thinking about your appetite from a volume perspective as you kind of think about it in context of where you want to see your leverage metrics go throughout the year or in balance of equity and debt?

Greg Stapley

Well Paul its Greg. We've been real clear with the markets that we want to bring our leverage down over time, but we expect to ratchet that down. In other words it's going to go down and then it’s going to go up and less it will go down some more last.

So we’re in a phase now where we just had an offering a few months ago that raised quite a bit of equity and we are in that ratchet up mode. But we don’t want to ratchet up too far as we continue to pull this down.

So in terms of our appetite, we’re still looking a lot and lot of deals as Mark says, we’re -- but we’re just being more selective about them and I think between the new credit facility and our hopes for the equity markets come back a little bit we feel like we should still be building and keeping, maintaining a pretty robust pipeline.

Paul Morgan

And I think you mentioned that you’re looking at new deals with Pristine as well, is there any more color, is it that stuff that could come to fruition say in the first half of the year, would it be material in size or one and two add on type deals?

Greg Stapley

Yes and no. We're looking at stuff for them, they just got into 1200 beds. We're going to give them time to absorb that, but we don’t mind -- we think they're doing super. We're watched them pretty closely and certainly they can handle -- wanted to more tack on opportunities.

And so we're working on some of those and yes, we could close something in the first half of the year for them. We really want to support our existing tenants above all. If they are ready to grow, we want to be there for them and Pristine is ready to grow some.

Paul Morgan

Great. And just lastly, there has been obviously a lot of commentary in the market place about some of the bigger national players and struggles with, in particular the Managed Care mix and declining length of stay.

How does that go into your underwriting as you look at the deal? Obviously, In Time has had a different experience I think in terms of managing that transition. But do you look at where things are now versus where they might be going whether the length of stay could fall first for the assets that you have. Your underwriting on the skill side is that a meaningful part of your consideration?

Greg Stapley

Look sure. It always has been. It goes back to where our core investment criteria, which is who is the operator. And frankly, I think I agreed with what Ensign said yesterday in their call. They called their commentary a bit misguided.

And because there are really a lot of operators out there who are not experienced in some kind of headwinds there are some of the big boys are apparently having right now. As the smaller, better, more local, more nimble operators are watching this coming in, there are no surprises here.

This stuff has been coming for a long time. In any organization, any operator who has been actively working with their hospitals with the managed care organizations, with the physician groups in their markets with others is not going to be blindsided by some cuts through Medicare advantage or the entry of BPCI or CGAR into the markets where they operated.

In fact if you look at Ensign they're the bellwether for this. They're actually looking to gain market share. Even at the same time they are actively cutting length of stay, they respond to the needs of their conveners and episode initiators and their other partners in the healthcare continuing.

So this is not a revolutionary change that the skilled nursing industry is undergoing. It's an evolutionary change. It is not a big surprise. It has been coming and it's those who have been willing to look have seen it coming from far off and have made adjustments and they're ready for it.

And those are the tenants that we look for. Those are the operators that we work with. Those are ones that we can get out and tell you, because of our operating backgrounds that we think that they're going to do fine and not only do fine, but maybe even do better in this new environment, which is a good environment.

You're talking about actual genuine fixes to some of the problems that affect the healthcare industry and have for a long time as they're trying to be more efficient and get cost under control. This is a good thing.

Paul Morgan

Great. Thanks.


Our next question comes from John Kim with BMO Capital Market.

John Kim

Thanks, good morning. I realize Ensign is a great operator and your coverage with them is very strong and over two times, but can you comment on their decision to close one of its facilities last week and if that's normal practice for them to do?

Greg Stapley

Sure. It's a good question and thank you. It's not normal practice for anybody to do, but they came to us a couple of weeks ago and basically just said look for variety of reasons we've decided that we would like to discontinue operations with this facility and then work with us and we worked cooperatively with them to figure out a win-win for everybody.

We think that they are -- this facility had been a significant distraction for them and I don't want to put words in their mouth or say too much about it but what they've said is that it was a very significant distraction and that from their perspective closing down one of their 180-plus facility seemed like the right thing to do, so they could focus on everything else that was going on.

For our part, we looked at it and said look, we're happy to let you do that, obviously, you can't hurt us. They did not have any plans or intent to do anything to hurt us. We continue to get all of our random into that master lease. And in addition we have the opportunity to take that asset out of the master lease if as and when we want to and monetize it.

So for us it's kind of free money where we can deploy into other high-yielding investments if -- when the time comes and we think that time will come hopefully relatively soon. But no, you should not expect to see them running around, closing down facilities on a regular basis.

In fact this is the first time they've ever done it in the entire history and while I can't predict the future, I'd be surprise if it didn't turn out to be last.

John Kim

Okay. And then what do you plan to do with the asset? Is it just going to be sold to another operator or is there an alternative use? Or…

Greg Stapley

Well, yes. The asset will be re-certified and so it won't be resold as skilled nursing facility. I don't think it will be resold as skilled nursing facility. We still have -- it's actually two assets in Texas, because you have the hard asset, the real estate and improvements.

Plus you have an intangible, which is these Medicaid bed rights, which are very valuable for which there is a fairly brisk market in Texas particularly in large metro areas and this what happens to be in Harris County which is in Huston Metro area. So those bed rights are going to be very valuable to us and we will have an opportunity to probably sell that real estate to an alternate user.

We are actually talking to a couple of alternate users who like to buy that kind of an asset and we purpose those assets right now and then with respect to the bed rights who are being contacted by more than one builder down there who would really like to have them to go build other facilities, we may redeploy them ourselves by hanging on to them and just redeploy them into other facilities ourselves.

So we have a whole range of options. We haven't really had a lot of time to think about it. But I guess my point is that there is a ton of value there and we'll look to be extracting that value over the long term from those assets.

John Kim

Is it most likely alternative use residential or retail or another kind of assets type?

Greg Stapley

There is -- we know some guys who convert former skilled nursing facilities and this is a fairly nice facility. It's not terribly well located, but it is in the County. It could be repurposed for assisted living. It could be repurposed for children's home, it can be repurposed for couple of other things. So we'll just see what the market brings us.

John Kim

And a follow up question, with the concerns on skilled nursing operators, you do have a very strong partner in Ensign and they're publicly traded. So we know how many operations are going. How do we get comfortable on Pristine and some of your other partners where we don't have up-to-date information?

Greg Stapley

Well, Pristine's financials have been included in ours. When is that, Bill?

Bill Wagner

We'll file their most recent annual statement, so basically 2015 next month in an amended 10-K that we will file. To the extent that they continue to stay material, we will continue to file their annual financial statement with our 10-K.

If they drop below a certain percentage then we are no longer required to file their financial statement. But I would expect us as these leases continue to call it age, we'll put out more disclosure on coverages and things like that.

John Kim

Okay. Thank you.


Our next question comes from Chad Vanacore with Stephens.

Chad Vanacore

Hi, good morning.

Greg Stapley

Good morning. Hey Chad.

Chad Vanacore

So I'm going to apologize because I missed the prepared commentary just hopped on late. But where are you seeing bare opportunities in your pipeline right now? Is it senior housing or skilled nursing or what mix of those?

Dave Sedgwick

Well, we continue to -- it hasn't changed significantly. This is Dave, by the way, hi Chad. It hasn't changed significantly from last year. It always had a dynamic and one portion is senior housing versus skilled nursing.

I would say, right now, we're seeing a little bit more in the seniors housing side. But the pipeline as a whole remains barely consistent with what it's been since 2015. With the cost of capital increasing and our experience with skilled nursing operators, we continue to be very bullish on the skilled nursing assets and the risk adjusted returns we can get there.

One of the things that you missed in Mark's comments is our philosophy is of not wanting to pay top dollar for A-plus top performing assets that have no place to go but down. Our sweet spot is find stabilized assets that still have a little bit of room to grow that coverage either Medicaid shops that are -- that have the ability to grow their skilled mix something like that. So we continue to look for those and do those…

Chad Vanacore

Good Dave, when you look for those the upside in those facilities what kind of occupancy range are we talking about where its stabilized but there still some more upside for you.

Dave Sedgwick

The, one example I think to point to would be the Liberty transaction that we did that was -- we considered that a great fit with our background and the philosophy that I was just talking about.

I think the occupancy when we took over a Liberty deal was low as 82% but the cash flow was very strong and has been really incredibly fund to see what Pristine done there in a very short matter of time and increasing that Medicare mix and Medicare consensus by almost 60% as we stand today as they report to that us.

So if that’s a perfect example of heavy Medicaid shop, room to grow both total expenses but also skilled mix and the other beauty of that is those assets are less susceptible to any impact by the CJR because they are highly, long term care beds and they're really just going to growing that least coverage for years to come.

Greg Stapley

Chad let me just add to that a quick comment about you asked about senses and in the high 70s, low 80s seems to be a sweet spot for us assuming the facilities there are running stabilized our cash flows, but the interesting thing is that they -- you can have stabilized fully a 50% it just depends on how good the operator is given a 100-bed facility, but there is only 50 patients and you can still run like a 50-bed facility and make plenty of money and we've seen that happen over and over.

That’s one of the key indicators that we look for when we’re bedding operators see how well they deal with fluctuations in their senses.

The other thing Chad just remember is what Dave just said about the fact that we're facilities that do have some organic upside in them as a rule. We're not buying turnarounds, but they do have some organic upside and we see that’s a much smarter investment approach and going out and buying some facilities that’s already 95% to 100% occupied and run 70% Medicare mix and really has no place to go, but down.

We like facilities that have some margin for error. We like facilities that’s we can get at fair price with some upside and as you see us investing that way, we’re still waiting for some actual data to come in, but anecdotally just talking to our operators it appears that the our lease coverages are growing across the board.

Chad Vanacore

All right, thanks. And then just thinking about that the overall market given the volatility in skilled nursing and then the slower acquisition pace of the senior housing, have you actually seen any changes in cap rates on the businesses that you're looking at?

Greg Stapley

Well that’s pretty -- that’s pretty fluid right now, but I think we are -- remember from the spin-off, we've always been ahead of the curve on cap rates because we did have a higher cost of capital than our peers and so we just had to stay up there and the question was asked earlier Mark about, can you really get these higher going in lease deals?

The answer is yeah, we’ve been getting them and we will continue to stay above the peer group and just look for those hidden gems and we think right now as I mentioned in my prepared remarks was I know you didn’t hear that we think we're moving into a buyer’s market at least all the indicators appear to be there. So yes we’re going to be able to make deals this year.

Chad Vanacore

All right. That’s great. Thanks.

Bill Wagner

Thank you.


Our next question comes from Jonathan Hughes of Raymond James.

Jonathan Hughes

Hey good morning guys. Thanks for taking my questions. Just had a few follow-ups, you mentioned standard coverage, solid and growing at times every two times, but I don’t think I have heard it overall portfolio coverage numbers if you could give us it will be helpful.

Mark Lamb

This is Mark. I would say -- I would say it’s about 1.82, I think is the last time we count we had. Since so many of the assets came in over the last call it 15 months, we don’t have a full trailing -- full trailing 12. So as we get into call it the second quarter, third quarter will be helpful trailing 12, but if we used call it the end of year the last kind of certainly ticking Ensign’s trailing 12 into account then the acquisitions into account and year-to-date financials that we have for them, it was 1.82 times.

All those more recently acquired facilities have come in, in pretty much in the 130 to 145 range on the SNFs and in the 120 to 130 range on the absent and we just don't have any data to tell you actually what the actual number is just anecdotal reports from the operators who report to us on the two quarter lag, we just know that they're doing better.

Jonathan Hughes

Okay, fair enough. On the $100 million you mentioned in the acquisition pipeline, what percentage of these deals are from relationships versus new operators, new relationships?

Bill Wagner

When is I follow that, hang on one second. 50:50, it is about 50:50 on new tenants as well as our existing tenant base. I will tell you that of the new tenant relationships these are folks that you call it core for many months and we know them intimately and we've been out.

We've seen this team's operations. So and that's obviously part of our learning process. But like we said in our prepared remarks, there is going to be some tack on in new relationships to begin with the regional operators.

Jonathan Hughes

Okay. And then last one just touch on Paul’s earlier question obviously at this point where stocks trading at issue equity at these levels, what's the top end of that leverage ratio that you feel comfortable with and are you concerned that levering up with acquisitions on the line may put you into kind of a share price overhang as the market anticipates a future equity raise?

Greg Stapley

Well to answer the latter part of your question first, of course, we certainly don’t want to get into a spot where we have our back standing wall. So it pushed on to shelf and the markets just stay kind of tight we have no problem heading for the sidelines and just waiting this thing out.

We’re not going to back ourselves up that way, but we did just renew our credit line and upsized it. We did just renew the term loan and the banks were very supportive. We do have ample access to -- ample liquidity to do what we want for the near term and we’re comfortable, we came down at seven times 20 months ago and we said we’re going to ratchet that down and up and down and up over time.

So if we bumped our net debt-to-EBITDA between low 6s we would still be very, very comfortable, but I would tell you that if we’re going to go that high, we’re going to do for deals that are super compelling and then we’re going to add a lot of value long-term.

And I just feel we remind you where we came from, we came from Ensign where we were always contrarian investors and we made a ton of money by having some dry powder and being out in the marketplace buying when everybody else was sitting on their hands. And so we will be careful but we smell opportunity and without backing ourselves up against the wall we will go out and take advantage of that.

Jonathan Hughes

All right, very, very helpful. Thanks for the color guys.

Bill Wagner

You bet.


Our next question comes from George Clark with RBC.

George Clark

Hey guys for your recent acquisitions did you replace the operator or was that operator already at the asset.

Bill Wagner

Yeah we replaced the operator there with our new operators.

George Clark

And then for the investment market are you guys seeing higher quality assets under your price range?

Bill Wagner

On the seniors housing side I would say that we have not yet seen the real IN Class A in Class A market private pay only our price range yet, but that's not what we've been tracking any way.

The concern with over supply we find less concerning when you look at the more affordable senior housing space in the secondary market. There is a lot less new supply coming on there and we get the better returns there as well. And so yeah, we don’t see that the top end senior housing starts enter that high 8, flow 9 going in cash yield that we've been enjoying on the more affordable space.

George Clark

Right and then what about on the sniff side?

Bill Wagner

Yeah, the sniff stuff we -- I don’t think if we would say that the assets that we've been purchasing are lower quality or more affordable type assets, its assets by asset and we see a range of assets in a skilled nursing space in our pricing.

It's more based on the market. So I guess we -- I would say I don’t see as much of a variance in the quality of the skilled nursing assets as it relates to cap rates as we do on the senior housing side.

George Clark

All right, thanks guys.


Our next question comes from Duncan Brown with Wells Fargo.

Duncan Brown

Hey guys, good morning most of my questions have been answered, but just a few, Bill I think in the press release the $85 million of the revolver is outstanding do you have full access to the remainder or is there anything else that need to trigged to pull down on that?

Bill Wagner

No, we need to acquire more properties to pull down more on that, but if you run the irrational out, we get 60% of any purchase price on an asset going in. We have we can go up to $400 million.

Duncan Brown

Got you. So in a real world scenario your base is still along as you use your revolver to buy assets, which of course you would, you be able to have full access to the 400?

Bill Wagner

That’s correct.

Duncan Brown

Got you. And then did I hear you on your guidance that you're assuming that a LIBOR of 1%.

Bill Wagner

That’s correct.

Duncan Brown

And so -- but that’s not a LIBOR floor is just that’s where you pegged it or is there a LIBOR floor?

Bill Wagner

There is no LIBOR floor, that’s just where we pegged it. We have four choices to choose from on a LIBOR contract one month, or two, or three and six month and we just used 1% to be conservative.

Duncan Brown

Understood. That’s helpful and then last one for me Greg I wanted high level questions and you made some comments about since you've been a smart snip paying attention to bundle payments talking with the hospitals, the managed care entities clearly wouldn’t be guard by these things and some of that big are seem to have.

I’m curious on your thoughts of what’s the acceleration here? What are you guys thinking about when you're purchasing assets that -- what are the other things that people should be paying attention to in this world?

Bill Wagner

I think it's really critical if you look -- you watch star rating. When star rating first came out everybody on the operators really hated them and they still probably do because the system rather imperfect, but it’s a reality of life and I think people have accepted the facts that they’ve got to get this star rating up.

Come 2017 they're going to be some structural changes in the way these charges come out of hospitals and if you don’t have at least a thee star rating on your skilled nursing facility you're not going to be able to take a lot of the discharges that are coming out.

And so it’s critical that operators and it takes a long time to move a star rating and if you have a one star rating because it's based on your operating performance three years back even if you buy a facility and step into as new operator make up thousand changes to fix it and make it better you're still dragging that operating history that serving regulatory history behind you for couple of three years until you can get that star rating up.

So we're going to be watching that and I think what you're going to see is when it comes to pricing on skilled nursing facilities, star rating is going to start to take -- is going to start to be a very significant factor because of that -- because it's going to dampen your revenues for folks whose star rating are too low and perhaps truly stay too low.

So that's just one thing that we see on the horizon. The other thing that I think you would -- we watch very carefully is compliance, what kind of compliance program does the operator have? How will attuned are they to the needs to maintain their medical records correctly, to build correctly, to run their facilities correctly, to evaluate their patients correctly.

Do they have a good solid compliance and auditing program to make sure that they're not only generate the revenues, but they long term get to keep those revenue because the government can come and take them back if you're not cross dotting your eyes.

And so you see some of the larger operators out there who are under investigation or who are operating with the big the overheads because -- and everybody to their -- in their defense I would tell you that the fact that they've got those investigations is not necessarily an indicator they’ve done anything rolling at all.

It’s just part of the realities of working in this industry. So if you have a good solid compliance program then you can demonstrate to government regulators that you are in store, you are less likely to have those kind of problems and so we watch for them.

Duncan Brown

That’s helpful and I’m sorry maybe a small follow-on, anything you can say about your portfolio and the associated star ratings currently?

Bill Wagner

Star ratings on our portfolio do we know what the Star ratings are? When we initially acquired Pristine, Pristine had a couple of -- had I want to say three to five facilities in the four and five star range. The bulk of the facilities were in the two to three star range and a few were in the one star range. So the balance of the other acquisitions in 2015 were probably average three star if I remember correctly.

So they’re all in pretty good shape from that perspective. So the great thing about as you take higher acuity patients and shift from being call it a Medicaid Shop to and more transitional care, the increased staffing is going to help on and starting to change the star rating and as they get in there and start to work on the quality measures and start to provide better care and really are focused on the specific MDs at each of the faculty they're able to change the quality measure piece and then the last piece of the star rating is the survey process.

So oftentimes when you get a Medicaid shop typically the Department of Health wants to see new operators that come in that are focused on providing care and you have companies that are focused on taking care of your staff, taking care of patients and so sometimes you can get the benefit of the doubt on the Annual Survey Inspections, when the Department of Health knows that you’re taking the building in the right direction.

So from Pristine’s perspective, we don’t have the exact count, but that’s something that we'll take a look at probably in the next quarter or two as we look to communicate their progress.

Duncan Brown

Great. That’s helpful. Thank you.


And I’m not showing any further questions at this time. I would like to turn the call back over to our host.

Greg Stapley

Well, once again thanks everybody. We appreciate your interest and your time and we're happy to answer any further questions you have at any time. Take care.


Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.

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