CareTrust REIT's (CTRE) CEO Greg Stapley on Q4 2016 Results - Earnings Call Transcript

| About: CareTrust REIT (CTRE)
This article is now exclusive for PRO subscribers.

CareTrust REIT, Inc. (NASDAQ:CTRE) Q4 2016 Earnings Call February 8, 2017 1:00 PM ET

Executives

Greg Stapley - Chairman & CEO

Bill Wagner - CFO

Dave Sedgwick - VP, Operations

Mark Lamb - Director, Investments

Analysts

Jonathan Hughes - Raymond James

Chad Vanacore - Stifel

Jordan Sadler - Keybanc Capital Markets

Joshua Raskin - Barclays

Todd Stender - Wells Fargo

John Kim - BMO Capital Markets

Michael Carroll - RBC Capital Markets

Operator

Welcome to CareTrust REIT's Year End 2016 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 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, normalized EBITDA, FFO, normalized FFO, FAD and normalized FAD. When viewed together with its GAAP results, CareTrust believes that these measures can provide a more complete understanding of its business, but they should not be relied upon to 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 or changes arise as a result of new information, future events, changing circumstances or for any other reason. Listeners are advised that CareTrust filed yesterday its 10-K and accompanying press release and its quarterly financial supplement each of which can be access on the Investor Relations section of CareTrust's website at www.caretrustreit.com. 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's Chairman and CEO.

Greg Stapley

Thank you, Christie, and good morning everyone, and thank you for joining us today. With me are Bill Wagner, our Chief Financial Officer; Dave Sedgwick, our Vice President of Operations; and Mark Lamb, our Director of Investments.

CareTrust REIT finished 2016 strong with an $84 million overnight in November and $96 million in new investments in December. We also continue to solidify our balance sheet adding 11 million under our ATM program in Q4 and reinvesting in sizeable percentage of earnings in new assets and revenues. For the full year, our total capital deployment was a record 288 million put out at an average to initial cash yield in excess of bank percent. We push well past the $100 million run-rate revenue milestone and cut the outstanding borrowings on our $400 million revolver to $95 million at year-end.

On a run rate basis, at 1231, our debt to enterprise value was a record low 32% and our debt to EBITDA was 4.6 times. Also during the year, our credit ratings were upgraded by both Moody’s and Standards & Poors and we crossed the critical $1 billion market cap milestone for the first time. In addition to setting us up nicely for 2017, all of this produced depending on how you count it, the total shareholders return of around 47% for the year. On behalf of everyone here, we’re grateful for the recognition and support that this market has lent to our efforts.

I am really proud of our team, which achieved these numbers notwithstanding a still hot M&A market, among other things they fully underwrote about seven to eight opportunities per week last year and picked through many more in order to find the hidden gems that make up our portfolio. And despite price competition, we remain disciplined as we seek out good acquisitions that we can pair with great operators to generate safe dividend for years to come.

To start, Dave will address our operating relationships then Mark will provide some details on our growth in our pipeline. Then Bill will conclude with some financials. Dave?

Dave Sedgwick

Great, thanks Greg. So, Greg noted that $96 million transaction we completed in December. Mark will talk about the assets shortly, but let me tell you about the new operator we brought in. Priority Management Group has everything we look for in a partner, big company sophistication, combined with small operator agility and emission driven culture. The principles have close to 60 years of operating experience and their company is built to scale throughout Texas and the South East. The transition is going well out of the gate, and we’re both eager to expand the relationship.

With respect to the broader industry, we stay close to what’s happening on the ground both with our operators and the sector at large. We continue to believe that the best operator will adapt to and thrive in the ever-changing landscape. The Ensign Group continues to be our gold standard for the skilled nursing space. We believe their current lease coverage is in line with prior quarters. We are also pleased to report a new addition to our team. Eric Gillies [ph] is a veteran operator who has come to us straight from the skilled nursing and seniors housing tranches.

We first met Eric when Greg and I worked alongside him back in our Ensign days where he distinguished himself as a top performer. Eric joins us to lead and strengthen our asset management function and will be instrumental in helping achieve the kind of hands-on oversight we’ve been working towards as our portfolio matured. Most recently, Eric has been working in the ultracompetitive Kansas City market where bundled payments and other changes have forced operators to adapt as quickly as in any other market in the country. We believe our tenants will find him to be great resource.

And now, I will hand it off to Mark.

Mark Lamb

Thanks, David, and hello everyone. As Greg and Dave have discussed, we capped off the year with an off market $96 million Texas acquisition. The effective age of these Dallas area assets is around five years. All are well located with two of the facilities within walking distance of the major hospital campus. Our going in cash yield on these was almost 9%. We also hit the ground running in 2017. Last week, we announced the two property $26 million senior housing acquisition in the Milwaukee metro area. These are also newer buildings and we pick them up as tack-on for our existing tenant, premier senior living at an initial cash yield of 8.3%.

We continue to value skilled nursing assets in the mid-9% range with lease coverage starting at 1.4 times with adjustments up or down depending on operator, age, location, skilled mix, reimbursement and other metrics. On the senior housing side, we continue to look for assets that target a mid-market consumer in secondary and tertiary markets that rendered lease yield in the mid-8% range with target lease coverage of at least 1.2 times. While the market for certain assets remains very competitive, we are cultivating excellent relationships with sellers and brokers sourcing a number of off market deals and distinguishing ourselves by striving to our household competition.

We remain optimistic about the quality of our current pipeline, which continues to hover in the $100 million to $125 million range. About 75% of the current pipe consists of skilled nursing assets with the balance in senior housing, but remember that ratio can vary significantly from time-to-time. We are excited that about half of the current pipe includes new potential operators and would expand our footprint in the several new states. Please remember that when we quote our pipe we only quote deals that we’re actively pursuing, which meet the yield and coverage underwriting standards that you are accustomed to seeing from us. And then only if we have a reasonable level of confidence that we can lock them up and close them. Bottom-line, we’ll enthusiastic about our process for the coming year.

And with that, I will hand it to Bill.

Bill Wagner

Thanks Mark. For the quarter, we are pleased to report that normalized FFO grew by 43% over the prior year quarter to 17.2 million and normalized FAD grew by 38% to 18 million. Normalized FFO per share grew by 12% over the prior year quarter to $0.28 and normalized FAD per share grew by 7.4% to $0.29. Given our most recent dividend at $0.17 per share, this equates to a payout ratio of 61% on FFO and 59% on FAD, which again represents one of the best covered dividends in the healthcare REIT sector.

As Greg mentioned, in November, we executed an overnight offering that was essentially match funded to our December 1st Texas acquisitions, netting us about 81 million. Also during Q4 2016 and into January of 2017 until our trading window close, we sold shares under our ATM program. We sold approximately 1.8 million shares at an average price of $15.37 resulting in gross proceeds of 27.9 million.

In yesterday’s press release, we announced our 2017 annual guidance range for normalized FFO per share of $1.11 to $1.13 and for FAD per share of $1.18 to $1.20. This guidance includes all investments made to date, a weighted average share count of 66.3 million shares and also relies on the following six assumptions. One, no additional investments, nor any further debt or equity issuances this year, our outstanding balance on our revolving line today is 110 million. Two, no rent escalations for any of our leases, our total rental revenues for the year again including only acquisitions made today are projected at approximately 108.5 million.

Our three independent living facilities are projected to do about 300,000 in NOI this year. Four, interest income of approximately 480,000, this is down from 737,000 in 2016 because the accounting rules limit the amount that we can recognize on our 2014 preferred equity investment, which capped out in 2016. The 480,000 is the income on two preferred equity deals that we closed in Q3 of 2016.

Five, interest expense of approximately 25.1 million; in our calculations, we have assumed a LIBOR rate of 1%, that plus the current grid base LIBOR margin rates of 185 bps on the revolver and 205 bps on the 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.

And six, we are projecting G&A of between 9.2 million and 10.2 million, which equate to under 8% of total revenues and again without reference any additional growth in our asset base or revenues this year. We have driven that percentage down every year and intend to continue to doing so. Our G&A projections also include roughly 2.4 million of amortization of stock comp. As for our credit stats, calculated on a run rate basis as of today, our debt-to-EBITDA is approximately 4.6 times, leverage is about 32% of enterprise value and our fix charge coverage ratio is approximately 4.5 times. We also have 60 million on cash on hand.

And with that, I'll turn it back to Greg.

Greg Stapley

Thanks, Bill. We hope this discussion has been helpful. We thank you again for your continued interest and support. And with that, we’ll be happy to answer questions. Christie.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Jonathan Hughes of Raymond James. Your line is open.

Jonathan Hughes

So, you’ve been utilizing the ATM quite a bit since you roll that out last year. How should we think about how you use that going forward and if that will decrease you propensity to do large overnight offerings?

Bill Wagner

Hi, Jonathan this is Bill. We’ll continue to issue under the ATM as long as we like where our stock prices trading and there is volume in the stock. As it relates to overnight, if we cobbled together enough material acquisitions or we have a big transaction that will do and we like what our stock prices is, we will probably do an overnight. The ATM gives us great access to fund these call it singles and doubles investments that we do, that we’ve been doing. And you saw that with this the February closing, that was a $28 million deal and we issued equity in December and January to match fund map. And also we’ll use the ATM and overnight to make sure our debt stays in a comfortable range which is around 4.5 times to 5.5 times on a debt-to-EBITDA basis.

Jonathan Hughes

And then in the past, you’ve mentioned you'd like to access the unsecured debt market at some point. Has the upcoming change to the Barclays Bond index for only issuances of $300 million or more will be included? Has that changed your assumptions on that front and maybe put term loans back into the mix any color there will be great?

Bill Wagner

Yes, the term loan market is in play for us right now and we like the pricing on that. To do a $300 million unsecured deal, we would need a lot of assets out there and we're just not there right now.

Jonathan Hughes

Okay. And then I guess it's definitely more, last May Gary Sabin retired from the Board and you commenced the search process for filling his role. Any update there, plans to increase the size of the Board with few more new directors?

Greg Stapley

Jonathan, it's Greg. No plans to increase the size of the Board, we think for company our size five is a really good number. And we do have a candidate that's in the final stages of vetting we expect to make an announcement soon.

Operator

Thank you. Our next question is from the line of Chad Vanacore of Stifel. Your line is open.

Chad Vanacore

So Greg, you've started off you said, you mentioned a hot M&A market and maybe think about the markets you're in, who are you competing with in general?

Mark Lamb

Hi, Chad, it's Mark. I would say the biggest competition coming from both operators as well as private equity. We're seeing some kind of repairs selectively, but for the most part the main competition is coming from the operators and the private money sector.

Chad Vanacore

Okay. And then Mark, you're seeing -- what are you seeing as far as cap rate of the market that you're in are they stable or are they compressing or are they widening out?

Mark Lamb

I would say they're -- I would say they're pretty stable. I think, typically, in the low-to-mid 9s, is where we're pricing stuff and is we're seeing stuff go from the low 9. But I think you take certain states particularly California, Pennsylvania, Florida, Virginia certain called it CON states or high barrier-to-entry markets, and you'll see your cap rates go below that. So, I think in general cap rates are somewhat flat, but there are markets that have the ability that people are paying off for despite property level economics, not been there today. A lot of folks are buying on what the potential that these properties can do in the right hands with the right operator.

Chad Vanacore

All right. And then when you're thinking about underwriting skilled nursing, how do you think about the risk, the potential changes in government reimbursement policy when underwriting that same lease for new operator? And then can you talk about specifically maybe I could say anecdotally, what kind of pressures skilled nursing operators are experiencing to you that they're concerned about?

Greg Stapley

Yes, let me take the second question first where most of our operators are making sure that they finding the right people and the right talents to prepare for. The new post-acute environment looking for the right people that they can scale with that they can kind of reposition their clinical product to meet the needs of bundle payments, shortened length of stay. So, increasing their clinical capabilities is first and foremost that on the front of mind for the most of the operators.

I would say going to the underwriting question, like I said in the prepared remarks, we started off the underwriting at a one-in-four coverage and then adjust from there. So, in certain markets where we have -- the facilities have high margins or a high skilled mix, we typically will increase our coverage. And a lot of this could be dependent upon how many Medicare Part A patients there are? What level of HMO, PPD are there?

And then conversely, we take a look the expense side and try to understand these assets in our operators' hand. Are there potential for cost savings right out of the gate? And so, we start off going for and then rise and fall. Historically, we’ve bought some largely Medicaid facilities and really we felt there has been nowhere to go, but up. And so, we could cut coverage, but as we’re seeing just a performing assets as well as non-performing assets, we start at 140 and then adjust from there. Like I said, the skilled mix is higher, we will increase coverage.

Operator

Thank you. Our next question is from Jordan Sadler of Keybanc Capital Markets. Your line is open.

Jordan Sadler

Just a little bit of a follow-up on pricing. I mean it sounds like things are stable somewhat, but there has been I guess relative to what we were seeing, let’s say pre-election despite the fact that maybe long-term interests rates are up, 50 to 60 basis points. You haven’t seen upward pressure on cap rates or you haven’t necessarily changed your underwriting standards?

Greg Stapley

Jordan, it's Greg. We changed our underwriting standards a little bit. We moved them up at the end of 2015, beginning of 2016. And through the course of this past year, our cost of capital has dropped a bit. So, we’ve looked at whether we should raise them a little bit and we are being very cautious about that, but we haven’t really moved them up materially in this past year and don’t plan to right now, but we’re keeping an eye on it every day.

Jordan Sadler

Okay. And when you look at the pace of transaction activity in that market, just try to -- not relative to the pipeline that you identified that seems to be at a pretty consistent level, but relative to the products that’s available for sale. How that is sort of flowed sequentially?

Greg Stapley

I think, you have to bifurcate the market into two different buckets. One, there are the huge portfolios that are out there for example the Kindred portfolio right now. And those are analyzed and priced and pursued in an completely different way end by, largely a different set of buyers than the smaller one-offs single and doubles, Bill talked about, which are the things that our bread and butter. We will bid on parts of large portfolios from time-to-time, but we really are sticking to our knitting with the smaller acquisitions that we can call together to put a good year.

Jordan Sadler

That makes sense. And then I guess back to Bill for just the financing side. This, the recent credit upgrades and you see the ATM, the lower leverage sequentially all looking pretty positive. Would you say, I know you touched on this, but would you say that your propensity is for lower leverage now as things are changing a little bit in the environment? I mean, obviously, you’re down would you look to continue to taper the overall level of leverage?

Greg Stapley

It's Greg. I’ll take that one, Jordan. We’re really comfortable with where we are right now. Bill articulated a 4.5 times to 5.5 times debt-to- EBITDA range. We feel good about that. Our belief is that we will be able to produce the best returns for shareholders while we stay in that range. And so absent any kind of anomalous opportunity call it, I think that’s where you'll see a stake. We could go below it, temporarily, but I think it's right where we want to be.

Operator

Thank you. Our next question is from Joshua Raskin of Barclays. Your line is open.

Joshua Raskin

First question just on Priority Management Group, I guess could you just give us a little bit more color on their operating breadth and what they do and how big they are? And then maybe just a little bit of background on how that investment came to you guys? I think you said it was off market.

Dave Sedgwick

Yes. So, Priority Management Group, they're a Louisiana-based operator and they were an introduction to us by the broker that was actually selling the portfolio to us. They come out of a big Mississippi-based company, 30 to 50 buildings, and they kind of been on their own for let's say five or six years and have a massive small portfolio in Louisiana and Texas. And they -- we like them because they are focused on what we believe to be the right things and they pay attention to -- they pay attention to the expenses, they know how to drive census.

They're focused the clinical side. THEY are very, very focused on building relationships with the acute hospitals. So for instance Baylor Scott and White as well as Texas Health Resources, they've already had meetings with both of those major acute hospitals systems in DFW, which two of the facilities are located right next to Texas Health Resource facility and Baylor Scott and White.

So, they just understand the business and the basic blocking and tackling of managing labor, pushing census, occupancies as well as skill mix. And we just like the fact that they are focused on the right things, culturally, and do right by their patients. And we feel like they're in a great position to continue to stay ahead of the competition in these particular markets that the post-acute environment just evolves.

Greg Stapley

And Joshua, this is Greg. I’ll take the second half of that question. How we came by this off market deal? It is really common in the skilled nursing industry for seller particularly local small moms and pops and small regional when they do decide that is time for retire, step away or get out for whatever reason. To be very cautious about widely marketing something because that tends to create a little bit of turmoil inside their operations, if that news get out, they're going to sell.

And so, they will go to a broker and say, look, I want to show this to one or two really nearly narrowly targeted by our candidates that we can count on to be confidential, to be good transaction partners and to actually close a deal. And we work very hard here at CareTrust REIT to be sure that we are that kind of a buyer. And so we have a relationship with the broker who got that call and brought that deal and said to us, can you do this and indeed we could, so that’s how that happens.

Joshua Raskin

You've answered my question on how a broker was not marketed. I guess the other question on this. What were they doing for financing before? Were these owned assets or all their other properties owned assets?

Greg Stapley

It was a combination of owned and I believe they had two leases from some kind of local Louisiana-based landlords. But for the most part, they're very conservative in their growth and really kind of bootstrap the facility that they currently have. So, the opportunity to step-up and take-on for buildings really kind of set the wheels in motion on kind of what they’re able to achieve. So, they have been able to scale up, make some incredible hires of some really, really good talented folks, operationally on the reimbursement side and then on the marketing side, as well as the therapy sides. So, this is really going to what we feel kind of jumpstart P&G into -- we expect to a lot of business with them in the future and start to tack on acquisitions in the very near future.

Joshua Raskin

Got it. And then just on the Milwaukee properties. Should we read into that in terms of where the opportunities lie? I know you said 75%, 25% in terms of SNF versus senior housing in the pipeline. But does the low eights yield on assisted living now feel a little bit more attract relative to nines for SNF or am I just reading into that is one transaction and that will make a trend of it?

Greg Stapley

Joshua, this is Greg. That’s just one transaction. And from our point of view, remember, we’re all skilled nursing guys, and so, we’re really comfortable in that arena. And at a low eights assisted living or senior housing deals versus a low to mid-nines skilled nursing deal. From a risk perspective for us, the way bet them I think those are equivalent risks. It’s just -- we'll take the pace to risk bringing for the SNF deal, so we'll take it.

Operator

Thank you. [Operator Instructions] Our next question is from Todd Stender of Wells Fargo. Your line is open.

Todd Stender

You talked about the one-in-four coverage. I think I missed frontend of that. Was that under the skilled nursing deals?

Greg Stapley

That’s right.

Todd Stender

Okay. It seen on the lower side, is that a projection or that's, how do have comfort I guess inside of one-five?

Greg Stapley

So, that’s our starting point and we adjust from there. So, if you have a 100% Medicaid facility, we did several of those transactions last year, high kind of 90% to 100% Medicaid revenue. One-in-four coverage is actually pretty good, but you start to add skilled mix to it. And as the skilled mix climbs, we go ahead and start to add the coverage from that perspective.

And then we also look at expenses what expenses can day-one be found by our operators. So, in certain transactions and some of your contracts can be put in place day one where meaningful savings can be realized. So, we start off one-in-four and move from there. So, last year, we underwrote SNFs. one of the transactions we closed. We closed at about 155, 160 coverage. So, it just depends on the building and depends on the operator that we put in there.

Todd Stender

Okay. Thank you. And then how about the senior housing stuff, did you guys talk about the coverage on that to you disclosed Milwaukee?

Greg Stapley

Through our underwriting, we underwrite about 1.2 times on the senior housing side. And there again it really depends, in this case premier is a great tenant of ours. We have six or eight buildings with them and so tuck-in these two buildings under the master lease just allow us to kid of spread the risk of this lease. And so these buildings -- so those were underwritten right in around one-two, I don't recall that the exact metrics, but that's we started at one-two and adjust based on the characteristics of the asset.

Todd Stender

Okay thank you for that. And then just kind a sticking which is the underwriting, I guess with the backdrop of new supply in general coming in assisted living. Potentially higher inflation for more of a pro-growth economic backdrop potentially I guess under president Trump. Any changes the way of your structuring leases, you generally pretty friendly leases compared to some of the peers. But that was under really an anemic or non-existing inflationary market, but any changes that you guys are potentially taking advantage of? Or any changes in CPI maybe multiples of CPI anything like that?

Greg Stapley

Todd, this is Greg. Remember that our leases are started a 15-year term along with some extension options for the tenants. They're very-very long-term leases. And we continue to believe that CPI based escalators with zero floor and maybe a 3.5 count is the right place for us to be and the right place for us to put our tenants, so that their health and wealth there is not impaired by fixed bumps, and may or may not in the distant future, or maybe not so distant future, may or may not match up with what's really going on in the marketplace.

Operator

Thank you. Our next question is from John Kim of BMO Capital Markets. Your line is open.

John Kim

Your EBITDA coverage improved this quarter, but it sounds like, it's going to be moved around quite a bit with acquisitions and then potentially moving back up as operations improve. But where do you see this figure ending up at year end?

Greg Stapley

At the end of this year, 2017?

John Kim

Yes.

Greg Stapley

I'm not sure John that we could project that. Because remember, we're constantly layering in new acquisitions, if you're asking about the overall lease coverage, the Ensign coverage has been pretty steady for the past few quarters. And while they haven’t released last quarter yet, we think based on our conversations with them that Q4 is about the same as it's always been at least with respect to our portfolio. And it pulls up, it still represents half our portfolio, and it pulls everybody up very significantly.

So, with respect to the portion of the portfolio that’s not Ensign, we would expect those that have been in the portfolio for a while to continue to season and mature and improve little by little overtime. But in terms of the overall, if you layer in some that are little below our average, you can -- might expect our coverage to sort of stay about the same to slightly drop overtime as we dilute Ensign.

John Kim

Thanks for that. It sounds like on a same-store basis that is going to actually improve and then on an overall basis, decline with acquisitions? Is that correct?

Greg Stapley

That’s actually good way -- wish I'd say that way.

John Kim

Okay. On your acquisition pipeline, can you just remind us what your typical closing rate is when you go through the pursuing process? Or actually stated another way, what percentage of the 125 million do you expect to close?

Bill Wagner

Yes. So, I would say it's going to vary. I think if you look back to the pipeline in Q3, we had the Texas acquisitions in there, which took out most of it. But you know I would say in general, our hit rate, I don’t know the exact statistics, but I would say we typically close about half of what we’re quoting in the pipeline.

John Kim

And so this was on your full-year guidance as far as acquisition, correct?

Bill Wagner

No, I am just saying on the pipeline that was quoted earlier, the 100 to 125. I think we would expect to close at least half of that.

Greg Stapley

It’s a SNF, so where we're today and as I mentioned in my prepared remarks, we’re vetting seven to eight deals a week.

John Kim

I'm sorry if I missed this, but did you provide guidance for the year as far as acquisitions?

Greg Stapley

As far as acquisitions, we did not. Our guidance is ex of any additional acquisitions.

John Kim

And then as far as your current pipeline, is there any preferred or meds that you’re looking at?

Greg Stapley

Not at this point.

Operator

Thank you. Our next question is from Michael Carroll of RBC Capital Markets. Your line is open.

Michael Carroll

Yes, thanks. I had a quick follow-up on an earlier question. With the uncertainty caused by the new administration, has this impacted the acquisition market at all in terms of opportunities that are available or specific valuations?

Greg Stapley

I would say, the Kindred is kind of the big transaction that out there, call it Q1 or thus far throughout the year-over-year. You’ve seeing a little bit of a slowdown in acquisition opportunities, our team, maybe the velocity that we saw in Q3 of 2016. And so, I think there is some kind of latency from the sellers in terms of what’s going to shake out. I think inevitably you have mom and pops that are committed to selling and going to get out before double payments fully take effect.

And but I think for the most part, right now, there is a little bit of low in the market in terms of number of quality transactions that are or a number of sales opportunities. But I'm just in talking a brokerage community and meeting folks last week out at ASHA, we would expect transaction pace actually pick up over the next two month, especially as we head into the spring mix. So, for the most part I think everybody knows what’s coming, and I think we’ll see a pickup in transaction flow.

Michael Carroll

Is there a thought process out there, an optimism that between any of the operators that the new Secretary could actually slow down the value-based reimbursement trend?

Dave Sedgwick

Hi, Michael. This is Dave. We watch that real closely and there is sense that Tom Price, if confirmed will be -- was confirmed will be helpful for the space. He gets skilled nursing and he's obviously opposed to the mandatory nature of bundle payments, but not necessarily bundle payments in general. But in terms of our underwriting, we’re assuming that everything is status quo and will continue down the same trajectory as before. But we really do like what we see in Tom Price.

Michael Carroll

Okay. And then I guess with Tom Price potentially being appointed, does that change how you guys look at any new types of deals, or there's no changes yet?

Dave Sedgwick

No, there is no change yet. Just put some color that we’ve gotten from some operators in Georgia that have worked with them. They really are positive about him particularly around his sympathy for the rural operators. So, there could be some benefit in rates there across the country, but we’re not at a point. We don't have visibility enough into that to include that into any of our underwriting.

Michael Carroll

Okay, great. And then Bill, can you talk a little bit about your CPI expectations? I know you didn't put it in your guidance last year either, but did you record a modest CPI rent increase on your leases last year?

Bill Wagner

Yes, there was a modest and it tended to go up closer to year end. As a general rule of thumb on our portfolio, our leases turn throughout the year. But if a 1%, call it a 1% increase in CPI would result in a $0.01 increase to our guidance range. And we run it out on a sensitivity basis on a 1%, a 2% and a 3%, and one is a penny too, as two penny and three is three penny.

Michael Carroll

Do you think that you'll have another modest increase this year at all and you're just being conservative, or do you expect the CPI will be virtually zero again?

Bill Wagner

No. I mean, if the trend continues, we expect to see a modest in the CPI count.

Operator

Thank you. And that concludes our Q&A for today. I’d like to turn the call back over to Mr. Greg Stapley for any further remarks.

Greg Stapley

Then again, thanks everybody for being on the call. We’re grateful and we look forward to talking to you again in about three months. Take care.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today's program. And you may all disconnect. Everyone have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!