CareTrust REIT, Inc. (CTRE) CEO Gregory Stapley on Q2 2019 Results - Earnings Call Transcript

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About: CareTrust REIT, Inc. (CTRE)
by: SA Transcripts
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Earning Call Audio

CareTrust REIT, Inc. (NASDAQ:CTRE) Q2 2019 Earnings Conference Call August 7, 2019 1:00 PM ET

Company Participants

Lauren Beale - Controller

Gregory Stapley - Chairman, President and Chief Executive Officer

William Wagner - Chief Financial Officer and Treasurer

David Sedgwick - Chief Operating Officer

Mark Lamb - Chief Investment Officer

Eric Gillis - Director of Asset Management

Conference Call Participants

Jordan Sadler - KeyBanc Capital Markets

Jonathan Hughes - Raymond James

John Kim - BMO Capital Markets

Michael Carroll - RBC Capital Markets

Todd Stender - Wells Fargo Securities, LLC

Daniel Bernstein - Capital One Securities, Inc.

Operator

Good day, ladies and gentlemen and welcome to the CareTrust REIT Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded.

I’d now like to turn the call over to Lauren Beale. You may begin.

Lauren Beale

Welcome to CareTrust REIT’s second quarter 2019 earnings call. Please note that this call is being recorded. Before we begin, please be advised that any forward-looking statements made on today's call are based on management's current expectations, assumptions and beliefs about CareTrust' 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 herein.

Listeners should not place undue reliance on forward-looking statements and are encouraged to review CareTrust'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.

During the call, the Company will reference non-GAAP metrics such as EBITDA, FFO and FAD or FAD and normalized EBITDA, FFO and FAD. When viewed together with its GAAP results, the Company believes these measures can provide a more complete understanding of its business, but cautions that they should not be relied upon to the exclusion of GAAP report. Except as required by law, CareTrust REIT 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, changing circumstances or for any other reason.

Listeners are also advised that CareTrust yesterday filed its Form 10-Q and accompanying the press release and its quarterly financial supplement, each of which can be accessed 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 for a limited period.

Management on the call this morning includes Bill Wagner, Chief Financial Officer; Dave Sedgwick, Chief Operating Officer; Mark Lamb, Chief Investment Officer; and Eric Gillis, Director of Asset Management.

I will now turn the call over to Greg Stapley, CareTrust REIT's Chairman and CEO.

Gregory Stapley

Thanks, Lauren. And welcome everybody, good morning. As you already know, it was a big quarter for us here at CareTrust on the acquisition front. On April 1, we closed on a $215 million 12 facility acquisition. I am pleased to report that to date those assets are doing every bit as well as we originally projected and they're continuing to improve. After that, we essentially match funded that investment with a well-received overnight that netted nearly $150 million in new equity for us and we continue to see solid deal flow as we head towards what could be a record growth year for our portfolio.

Our leverage is near an all time low and we are well positioned to selectively take advantage of opportunities large and small as they arise. With those acquisitions and others, we crossed the $300 million mark and acquisitions very early this year. $300 million has always been an internal annual target for us, historically taken a whole year to reach, but that has never been the overarching objective. That's never been the goal and certainly never been the only goal.

Our goal for 2019 is much the same as it has always been to enter the next year, in this case, 2020 as a bigger, stronger, leaner and more sophist organization than we've ever been. Knocking out so much of our external growth targets so early in the year has afforded us the opportunity to more closely look inward now, which is something that all organizations must constantly do to survive, thrive and keep moving to the next level.

For us, this entails critically reexamining each individual asset and operator relationship on our portfolio as well as every function and department in the organization. We're still in that process. In fact, we would argue that we should never not be in that process to some degree. And we've identified through that process some positive changes that we think we can make.

For example, like all REIT's, we have a few less desirable individual assets in the portfolio that we've unavoidably picked up in larger transactions. We believe we can now consider trimming some of those assets from the asset base.

In our operator pool, we have a relationship or two where the operator's situation, priorities or overall business have changed and maybe they don't necessarily align with our priorities the way we would like them to. Inherent home are relatively small, but still has some long-term goals that are unmet and capabilities that need to be expanded.

And so in a year when others might have rest it on their laurels after such a fast start, we are busier and making more waves than ever. Some of this is not easy, but we do it because we believe this rigor will make us a stronger, leaner and more capable CareTrust now and for the future.

So with that, I'd like to turn some time over to Dave to talk about our current assets and operators and to talk about one of the upcoming changes that we're making. Then Mark will discuss recent acquisitions in the pipeline and Bill, will wrap up with the financials and guidance. Dave?

David Sedgwick

Thanks, Greg, and good morning. So, on our last call, I discussed how we're continually reevaluating the portfolio and our operator pool. This practice has been helpful and asking some hard questions about where our operators and assets are and where they might be headed? In that light, let me talk about Trillium in Ohio.

In December 2017, Trillium moved quickly to replace Pristine in the more challenging part of our Ohio portfolio, which included seven assets in the Cincinnati area. Ohio was a new state for them and they struggled to gain traction there.

We've reported for several quarters that we've been staying close to them as they've worked through what they need to return those buildings to prior performance levels. But we've been clear that we never felt that they were out of the woods yet. In recent weeks, we and Trillium have come to the conclusion that a change is best for them and for these facilities.

Replacing Trillium allows us to accomplish three objectives. One, to prune a couple of the most challenging facilities that would otherwise require a lot of heavy lifting to return them to prior performance; two, bring in an operator for the remaining assets with more experience and resources in the region; and three, to allow Trillium to refocus their efforts in Iowa, where we expect to retain them in 10 facilities.

As we reported in our Q and press release yesterday, we're in the process of selling three of the facilities and re-tenanting the remaining four. As we sit here today, and we expect those transfers to occur on September 1, subject to normal diligence and state approval processes. After the dust settled on the repositioning of these seven assets, the new Trillium lease will represent approximately 2.2% of our revenue.

Shifting gears to our seniors housing portfolio. Overall coverage decline from 1.3x in Q1 to 1.22x this quarter. This appears to be fairly consistent with what we think we're seeing across the industry on a trailing 12 basis. However, during the quarter, we began to see some real improvements in several of our assisted living assets.

For example, our largest seniors housing operator outside of Ensign's premier, and last quarter we previewed for you some of the initiatives and personal changes underway at that tenant. Those initiatives have begun to produce some solid occupancy increases in a number of our premier facilities in the second quarter and since.

There are only 20 assets included in our non-Ensign seniors housing lease coverage number as reported in our supplemental and the premier assets represent eight of them or about 47% of that revenue. So it's worth keeping in mind that 20 assets as a relatively small group and a swing in the performance of a couple of facilities can make for a fairly volatile coverage graph quarter-to-quarter.

That said, we're seeing positive trends not only in premier, but also in other areas of the seniors housing portfolio and we expect to see overall coverage climb modestly over the next couple of quarters.

Internally, in recent months, we've strengthened our asset management and underwriting processes with third-party data sources. As we become more adept with them, we're impressed with the way these sources are helping us benchmark, our current and prospective operators as well as target acquisitions against the competition in their markets and states. We've also recently hired another outstanding former operator to supplement, Eric and our Asset Management team.

Looking at the broader industry, there hasn't been any material change to the plain field since last quarter for our operators. Labor costs are still challenging. Highlighting how being a best-in-class employer and healthcare provider go hand-in-hand, the 2.4% Medicare rate increase coming in October is certainly positive for our skilled nursing operators and we and our tenants likewise remain optimistic about the opportunities from the switch from RUG-IV to PDPM.

And with that, I'll hand it over to Mark to talk about the pipeline. Mark?

Mark Lamb

Thanks Dave, and hello, everyone. In Q2, we closed approximately $241 million in new investments. This included the $215 million acquisition of the 12 building portfolio in Texas and Louisiana that we closed on April 1. It also included our May 1st acquisition of 118-bed skilled nursing facility located in the Dallas – Fort Worth MSA with Next Gen P for $10 million.

Lastly, in June we triggered our purchase option on Cascadia of Nampa, a brand new state-of-the-art 99-bed skilled nursing facility located in Nampa, Idaho for $16.1 million. Our year-to-date total investment amount is $305.2 million and we expect to add to that over the coming months.

Among the other things, we anticipate that our preferred equity investments in Cascadia of Boise, a second brand new state-of-the-art 99-bed skilled nursing facility located in Boise, Idaho that is now nearing stabilization, will close by year-end at a similar price to the price we paid for its sister facility in nearby Nampa.

The acquisition market continues to be made up of mom-and-pops sellers of one-off facilities to small and midsize portfolios of non-strategic facilities ranging from non-stable and broken to breakeven and more stabilized. Pricing for SNF continue to be aggressive in states such as California, Maryland and Virginia. While states like Texas continues to see fallout of the failed bed tax proposal from this past legislative session with several buildings on the market and more on the way.

We continue to underwrite and evaluate many deals and pair them with our operators in their specific markets as well as markets in which they'd like to grow. We've seen some lumpiness in our deal flow over the past quarter, which is normal and we would expect investment opportunities to pick up as we head into the fall in next months in that conference.

Turning to the pipeline. As we sit here today, the pipeline isn't our normal $100 million to $125 million range. It consists mostly of singles and doubles and a couple small portfolios and includes tack-ons for our existing operators as well as deals we compare with our new operators.

Please remember that when we quote our pipe, we only quote deals that we are actively pursuing, which means the yield coverage and underwriting standards we have in place from time-to-time, and then only if we have a reasonable level of competence that we can lock them up and close them.

And now, I'll turn it over to Bill to discuss the financials.

William Wagner

Thanks Mark. For the quarter, we are pleased to report that normalized FFO grew by 35% over the prior year quarter to $33.1 million and normalized FAD grew by 34% to $34.3 million. Normalized FFO per share grew by 9.4% to $0.35 and normalized FAD per share grew by 9.1% to $0.36. Given our most recent dividend of $0.225 per share, this equates to a payout ratio of 64% on FFO and 63% on FAD, which again represents one of the best covered dividends in the healthcare REIT sector.

Our leverage and liquidity positions continue to remain strong. In the quarter, we closed our largest investment today and sold via an overnight offering, 6.6 million shares at $23.35 per share, resulting in net proceeds of $149 million. We did not sell any shares under our $300 million ATM that we put up in Q1 and our revolver balance currently sits at $55 million.

For guidance in yesterday's press release, we maintained our 2019 annual normalized FFO per share guidance of a $1.35 to a $1.37, and our 2019 annual normalized FAD per share of a $1.40 to a $1.42. This guidance includes all investments made in announced today including the expected closing Q4 of our remaining preferred equity investment as Mark mentioned.

The Trillium restructure is previously discussed by Dave, a diluted weighted average share count of 93.4 million shares and also relies on the following assumptions. One, no additional investments or dispositions nor any further debt or equity issuances this year; two, inflation based rent escalations which count for almost all of our escalators at an average rate of 1.5%.

Our total rental revenues for the year, again including only acquisitions made today are projected at approximately $166 million which includes approximately $2 million of straight line rent. Not included in this amount our tenant reimbursements or write-offs of accounts and straight line rent receivables, which we previously accounted for on their own line items in the income statement. Due to the new leasing standard these are now grouped with rental revenues.

Three, our three independent living facilities are projected to do about 500,000 in NOI this year, four, interest income of approximately $4.2 million, $5 million, I've interest expense of approximately $28.5 million. In our calculations, we have assumed a LIBOR rate of 2.25% that plus the newly reduced grid-based LIBOR margin rates of 125 bps on the revolver and 150 bps on the seven-year term loan, makeup the floating rates on our revolver and term loan.

Interest expense also includes roughly $2 million of amortization of deferred financing fees. And six, we are projecting G&A of approximately $13.9 million to $15.1 million. Our G&A projections also include roughly $4.1 million of amortization of stock comp.

As for our credit stats calculated on a run rate basis as of today, our net debt to EBITDA is approximately 3.4x, leverage is about 20% of enterprise value and our fixed charge coverage ratio is approximately 6x. We also have $10 million of cash on hand.

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

Gregory Stapley

Thanks, Bill. In Dave’s remarks, he mentioned that Eric’s asset management team grown with the addition of a new operator. We're excited about that. I'd be remiss if I didn't mention the CareTrust family has grown with the addition of a new lamb. Mark and Erin had a new baby over the weekend and he's a little bleary-eyed today. But we congratulate them.

We hope this discussion has been helpful. We thank you for your continued support and with that we would be happy to answer questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jordan Sadler of KeyBanc Capital. Your line is open.

Jordan Sadler

Thank you. Good morning.

Gregory Stapley

Good morning.

Jordan Sadler

I just wanted to start with Trillium, if I could. Bill, maybe can you walk us through what's embedded in guidance for the reduction from Trillium I guess from an FFO versus AFFO perspective?

William Wagner

Yes, I can do that. We have for the remaining – rest of the year, we have Trillium in there at around $300,000 per month. We have a new tenant coming in at around $2.2 million on an annualized basis. And we also have interest income or we're providing seller financing on the assets that we are selling. And we have about $2.8 million in there on an annualized basis for that. So you just have to put it in for those periods that they are outstanding within 2019 for derive at your guidance number.

Jordan Sadler

So, on the latter two things, on the new tenant and the $2.8 million of interest income those are starting in 9/1?

William Wagner

Correct.

Jordan Sadler

September 1. Okay. Are those all cash numbers you just threw at me? $300 million a month, the $2.2 million and the $2.8 million.

William Wagner

Yes. They are all cash.

Jordan Sadler

Is there a difference versus GAAP? I imagine Trillium has got escalators, right?

William Wagner

Trillium has escalators in there. There is a slight increase in the straight-line rent from last quarter to this quarter of about $100,000.

Jordan Sadler

Okay.

William Wagner

Spread out over a period, July through December.

Jordan Sadler

I think I'm going to have to follow-up with you for that. It just because Trillium was paying a $12 million GAAP rent in 2Q, or $1 million and change a month versus now something that looks like 300 a month plus the straight-line rent. So that's probably a big delta. But I'll follow-up with you after, unless you have a quick explanation there.

But separately you talked about Greg in your process here, looking forward that it's incumbent upon you to basically asset management portfolio and to look within opportunistically and fix what's going on before it – seemingly before it's an issue.

So one, I'm kind of curious what the catalyst was for Trillium in Ohio that sort of was the straw that broke the camel’s back, so to speak. And then, are there any others tenant wise or assets that you identified that you could sort of point to, just also you managed that or managed somehow?

Gregory Stapley

Sure. I'm not sure I'd point to any particular straw that broke the camel's back. Just after 19 months, it was really just time to have a serious conversation about how they were doing. It had been a couple of quarters that we've been saying, look we're not out of the woods. They're not in the woods.

And so it just became time to have that that hard conversation. As we mentioned that piece of the Ohio portfolio included the most challenging assets, and we really felt like there was a different tack that we wanted to take there with them. So it took some discussion, but very quickly they realized that that was probably right.

And so we've been working cooperatively since the middle of July to come to a resolution that results in the best outcome for both them and for us and most importantly for patients and residents in those facilities, and for the preservation of value in those facilities.

We could've waited longer. We could have, let this go and kind of cross our fingers and hope things would get better. We could have continued to work with them as we do with all of our tenants to provide input and insight on what we thought could happen. But honestly, it was just a – there were just much better options, and they and we agreed on that for those assets and then investment going forward.

With respect to the rest of our operator pool, I got to tell you we really love our operators, almost all of them are very open and transparent with us. We have really good back and forth dialogue. They welcome the portfolio management efforts that that we are making and the operator background insight that we can provide as a rule.

That said, sometimes things just changed and there are every once in a while you have an operator who just decides they don't want to grow. We had that happen with an operator that we have in the portfolio. I think the first deal we ever did was an operator out of Idaho who ultimately decided that his life was going to take a different direction. And so we sold those back to him at a small profit, and on our way. It just wasn't worth maintaining a relationship that small.

They have other operators whose situations changed for one reason or another and you just got to constantly reevaluate that and look at it. Somebody who was a superstar two years ago may for – through no fault of their own or maybe through fault of their own, is not the best choice for a portfolio looking forward today.

And I think there's ample precedent for the idea that you should be – anybody with a business or a portfolio or a group of businesses should be constantly striving to be the very best in the business, and sometimes that means you take the bottom, tier and you do something with it, whether you fix it, change it, lop it off or do something. And I think as I said, I think we'd be remiss if we were not proactively asset managing our portfolio and our operator pool all of the time. Is that okay?

Jordan Sadler

Yes. No, that that works, and that's helpful. I guess the one other sort of follow-up on Trillium would be, this is sort of Pristine, sort of rearing its head again and I think that post Pristine, the lessons learned were really, the enhancement and the focus on the scorecard.

I know Trillium was an existing operator for you guys that you kind of moved over into Pristine assets? I'm just curious what sort of – if there's sort of a lesson learned, post-mortem here on either, some portion of the assets here in Cincinnati or on for the scorecard vis-a-vis Trillium?

Gregory Stapley

Yes. Well, I appreciate your bringing up the fact that that these assets that we transitioned from Pristine. If you remember where we were back in the fall of 2017, we were working very hard again to preserve value in a very large portfolio that at the time represented like 16% to 70% of our revenue.

And to be able to move the refer half of it off, into the hands of an operators that we knew and liked and trusted in Trillium was – and to do it in fairly short order. We moved out on December 1, 2017 was a real win for us. Especially when you consider the very minimal amount of rent leakage that we experienced in that transaction.

So – but as Dave pointed out in his prepared remarks, Trillium was new to Ohio at the time. They were having input resources; they were having to do other things; they were having to learn new systems. And as they went through that process, they were doing okay initially and then they lost a couple of key personnel, they invested in heavily in that state. And that was back at the beginning of this year.

And since then it's just been a really tough slog for them. And plus at the same time, you may recall because I know you cover other landlords. They were engaged in some fairly sensitive conversations with one of their other landlords over some assets in another state that needed to be closed. And that we believe they've told us has taken a very substantial tool on their time, their attentions and their cash flows.

And so it really got to a mid-July and it was just time to really have that hard conversation with them. we don't dislike Trillium we update our scorecard regularly and certainly things for them have changed a bit, on the way they look in that scorecard. But it's still good enough for us that we want to keep them in Iowa and the Georgia asset and continue our relationship with them.

In terms of other things that we've learned, I guess the bottom line is, if you've got the timing opportunity, which I don't believe we really had back in 2017. You would place a very high premium on the importance of local knowledge experience and relationships. When you were looking for the right fit between an asset or group of assets and an operator.

And I think you would also be very careful to have a Plan B, C and D in terms of operators every place where you have assets that could change – where the situation can change overnight. This is a healthcare business and you don't want to foment any kind of worries about headline risk with healthcare, but you all know it very well and that it changes and so it's really good to have options, if and when those changes post challenges to the folks operating your assets.

Jordan Sadler

I appreciate all the color. Thank you.

Gregory Stapley

You Bet.

Operator

Our next question comes from Jonathan Hughes of Raymond James. Your line is open.

Jonathan Hughes

Hey, good afternoon. Can you give us an update on the other former Pristine assets in Ohio that are operated by Trio and Hillstone that I think were admittedly the easier ones?

David Sedgwick

Yes. Hey Jonathan, this is Dave. Regarding Hillstone they took two of those buildings and are doing just fine with those Trios and took the Dayton area portfolio. Those were admittedly better performing assets compared to the Cincinnati seven. Let's say the Trios senior operational and clinical leadership has personally invested countless hours into those operations and markets.

And those efforts are starting to translate into some traction with key decision makers in those markets and key relationships with a major health system there, which is some momentum that they were really happy to see that we believe will lead them to really ramp up their census and hitting their census projections. Another tailwind for Trio is just the increase in the Medicaid rate that Ohio recently passed.

That's going to be a material benefit for their portfolio, especially if you've coupled that with the increasing census that we expect in the second half of the year. So they're making really good strides. They've invested a ton in their people, in their leadership, in marketing and in clinical results. So again, like we said last quarter, they're also not in out of the woods yet, but they do have some momentum and traction that we really never saw in Cincinnati.

Jonathan Hughes

Do you think they would be open to taking the four-year plan to keep or, I mean obviously I assume they’ve looked at it 18, looked at those 18 months ago or so and maybe didn't choose to take them then. I'm curious if we can expect to maybe see an existing operator take some of those four or would it be a new relationship?

Gregory Stapley

Yes. So Trio has their hands full in the Dayton area and we actually didn't show it to them because we know that – we know where they're at with their plan in Dayton. We are right now talking to a few different operators for the remaining four, including new and existing CareTrust relationships. And unfortunately as we sit here right now, it's premature to say who that's going to be.

Jonathan Hughes

Okay. And then I guess just sticking with you, Dave, you did talk about senior housing coverage earlier mentioned Premier is going well, but I mean that implies the other, I think 12 of those 20 properties saw a pretty decent sequential dip, I get at the small pool so that can be bottled. But was there one or two specific properties that caused that drag or was it pretty broad base in terms of the coverage dropped there?

David Sedgwick

Yes, there were two or three properties that really kind of took a step back from a census perspective. And we're working closely with those guys and watching – helping them to get that back up.

Jonathan Hughes

And maybe one on average, where those 12 bought?

David Sedgwick

When were they bought?

Jonathan Hughes

Yes, it would have been pre – is pre-2018, right?

David Sedgwick

Yes.

Jonathan Hughes

Okay. I'll go back and look at that, all right. And then just one more for me, for Mark, first off, congrats on the new addition, but I was hoping you can give us some more details on the pricing for deals in the pipeline. You said it's aggressive on the West Coast and Northeast. And then can you comment on the expected cadence of external growth through year end?

Mark Lamb

Yes. I think as we look at our pipe, the number of the transactions that we're narrowing in on our off market. So despite pricing being aggressive in certain of these states, we feel like we're buying them right and carrying them with operators in specific markets that had experienced in those markets. So we expect good things once we closed the transactions and the operators have the ability to get in and execute their business plan. So as we sit here, I think – the question is how close did we get to $400 million this year?

I think we feel pretty good about a lot of our pipeline. And so from a pricing perspective, it's a mix of assisted living and skilled nursing, definitely slanted towards skilled nursing, pricing anywhere between, I'd say 9 and 9.25 on start rates and then a couple that are kind of in the mid-9. So it's really all over the board and it's really kind of state specific and competition specific in those specific states. So did that answer your question?

Jonathan Hughes

It does. And then maybe just pricing on the small senior portion of the pipeline that's in there, the pricing there.

Mark Lamb

Yes, I would say it's kind of in the low-to-mid 8s in a good West Coast market.

Gregory Stapley

Hey Jonathan, it’s Greg. On the pricing, I would just add this. It remains pretty aggressive and kind of is what it is. But we continue to maintain pretty tight underwriting standards on what we're willing to pay and what we'll put those leases out at. Our coverage requirements have actually climbed and we've been willing to even give up some yields to get better coverage.

And that's probably one of the reasons you see us doing less assisted living, seniors housing, than skilled nursing because the delta between what we're willing to do on the coverage front, on some of these assisted living assets and what kind of the market has been is still fairly wide. It's much closer and more – it's a gap that we can close, on the SNFs asset. I just want to add that.

Jonathan Hughes

Okay, all right. That's it for me. Thanks for the time.

Gregory Stapley

Thanks.

Operator

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

John Kim

Thanks. Good morning. On Trillium, back in couple of years ago when you transitioned the assets to them Pristine, you set the coverage – the rent coverage at 122, which at the time seemed tight. But I was wondering if you had said it at 13 or 15 or just some number more conservative than that. Would you have still transitioned Trillium out or would that change have been inevitable?

Gregory Stapley

It's a great question, John and I wish the answer were, that if we had set the coverage a little higher that that we wouldn't have done what we did, but that's really not what the motivation was here. There were a lot of things going on for Trillium and it would not have made a difference if we'd added another 10 or 15 or even 20 bps to that coverage.

We still believe that that portfolio has a lot of potential, a lot of upside and we like most of the assets pretty well. But we would still be doing, what we're doing right now by way of cooperating with Trillium to refocus them in Iowa and take them out of Ohio.

John Kim

Okay. And then looking back again, the year after at the Pristine transition, 2018 it was a very, relatively slow acquisition volume year for you. It doesn't sound like it's the case this time around and I'm wondering why you're confident that you'll continue to grow externally. Is it because you're a bigger Company today? Are the balance sheets better or you just seeing more opportunities in the pipeline?

Gregory Stapley

Yes. I think kind of the timing of the transactions that we've been working on. As you know, when we closed on the two big transactions earlier this year, those took, took a lot of time. But while we kind of hit certain periods in Q1 waiting for the big project, Gulf Coast transaction to close. We're reloading the pipe and working on everything that's kind of hitting, now and over the next quarter. So it's really just kind of a function of the really the transactions and where they're coming in and the timing of those.

John Kim

And my last question is on Ensign. I think you've cited in the past that one of the successful characteristics of Ensign as an operator is that they have a decentralized management structure. And I'm wondering if you see that in your other operators, if you think that's important for some of your other partners and it's something that you potentially recommend that they adopt?

Gregory Stapley

Yes. We all want to answer that one apparently. Everybody's got an opinion on that. It's a great question. I'll just start and then let Dave and anybody else jump in. That really works well for Ensign. And we haven't come from there. Obviously, believe wholeheartedly in that decentralized highly internally accountable kind of organizational structure. It's worked super well for them, and I think it lends itself well to the personalities over there.

And one of the things that we've learned is we've come out and started dealing on a very close basis with lots of other operators is that everybody's personality is a little different. And some people – well some people are able to do that and good at that, that is a very different skill set and not a lot are able to let go of control.

That said, most of our operators are fairly small and so they're not really at that point where it becomes, necessary for them in our view. If we're applying the Ensign model and mindset for them to start relinquishing more of that controlled. But we do see that that is a great management and operating philosophy, and we do preach it fairly regularly to our tenants. Dave?

David Sedgwick

The only thing I'd add to that is – that in speaking with our operators and as we vet new operators. The amount of priority that they give to the administrator and local leaders is always a really important point for us. And there's different ways to skin that cat. But if we come across a company that we feel does not value the local leader, even if they don't have a decentralized model, again sign, we're going to be really various of doing business with them. Because what we are convinced of is that talent at the local level, even really discreet regional level really matters a lot. And so that that's certainly part of our conversation with her existing and prospective operators.

John Kim

Thank you.

Gregory Stapley

Welcome.

Operator

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

Michael Carroll

Yes, thanks. Greg, can you provide some color on the Company's Asset Management Plan? I know you said the Trillium was one of those more difficult decisions that you had to make? Do you anticipate making other decisions or is this just the only issue that you're currently tracking?

Gregory Stapley

Yes, Mike. Let me thank you for the question. Let me just clarify, if I left the impression that it was a difficult decision. I mean really by the time we got to sitting down and really thinking hard about it. It wasn't that difficult at all. It was a difficult conversation. But the decision was fairly obvious at the time. So and we think that's really the way it ought to be, if we look at these things and sort of step out, where's this going and what's the likely outcome?

The urgency to act early, while you have time before things really deteriorate is it should be just all consuming. So that's where we're at. We did say that we are looking at our whole portfolio. We did say that there are one or two other things in there that that really merit some close attention. It would be premature to say anything specific about any of those situations.

But we are having regular conversations with all of our operating partners and once in a while, one or two of those conversations a little tougher than the others, but for right now that's probably the most we would say.

Michael Carroll

Okay. And then those other two – or multiple conversations that you may be having. I mean, is that basically you offering additional support, giving them advice and what they need to do or is it could be much more significant where you'd have to help them transition part of their portfolio does somebody else?

Gregory Stapley

Yes. Look it really runs the spectrum and we probably portfolio managed different than others do because we do have these operating backgrounds and we are injecting, Eric, Dave, Mark, these guys are all licensed nursing home administrators. The new guy that we're bringing in the for Erik's team, licensed nursing home administrator with long and deep experience.

And these guys are out in the field, talking to them on multiple levels and multiple, it depending on what they're seeing and what the opportunities are. I mean, hopefully they're just seen opportunities and levers that have yet and pulled in and those kinds of things. So those conversations are happening all the time and the mostly, mostly, mostly go really, really well and are very, very well received.

So when you've gone out and you've said the same thing, five months in a row and there's still not anything happening that you need – that the conversation shifts a little bit. So again, we're very, very active on that front. We can't tell our tenants what to do. We can't make our tenants do anything in their operations, we would never try, but we can certainly offer a lot of counseling inside of the second set of eyes for them. And again, almost all of them are almost all the time very receptive.

Michael Carroll

Okay. And then related to the senior housing portfolio, I think Dave was mentioning that there is some potential occupancy improvement or there has been some weakness in census and you're offering some support to get occupancy higher. What can the operator do to help drive occupancy and is that something that we need to be watching more closely going forward?

David Sedgwick

Well, the operator can do a lot for seniors housing occupancy, and luckily we've got in our asset management team, Eric, and the new incoming portfolio manager have actual experience, not just nursing home – with nursing home administration, but running seniors housing as well. The approach in seniors housing to drive occupancy is really multi faceted.

There's internal cultural customer service things. There's external facing items, curb appeal, how you give a tour. I mean, we could go at length and I don't want to take up too much time on that, but Eric, when he's with those operators, he'll tour the building, he'll secret shop or secret shop the competition, will provide great feedback as to opportunities that they have to improve their process to drive that census up.

Michael Carroll

Okay. Do you think that the changes – I mean have they recently implemented changes that should help occupancy over the next few quarters or has this been going on for some time?

Gregory Stapley

They have recent changes from recent changes in leadership as well. And so when you have a change in leadership in an organization at a regional or a Chief Operating Officer level, they bring in their ideas. It takes several months to get the water to the end of the row. But yes, this is recent initiatives that are in place that we're already starting to see some improvement from.

Michael Carroll

Okay, great. Thank you.

Operator

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

Todd Stender

Thanks. Greg, you kind of touched on this before with pricing in the skilled nursing space. You guys have been pretty good about getting 9%, very consistent 9% yields. It's about as consistent as anywhere in the REIT space, but we're facing historically low interest rates. So does that have potentially impact pricing? I know it's a different property type, just kind of got a multiple on cash flow, but what do you think about rates coming in so low?

Gregory Stapley

It's a really good question and it's certainly a fair one. And I'll let Mark weigh into this too if you'd like, but I don't think we're seeing any impact from rates coming down on cap rates for these assets. Pricing tends to be what pricing has been and it's probably more affected by changes in local markets. What's going on in the local Medicaid program? I mean, for sample you look at, what's probably doing – already happening in Texas with the failure of the bed tax bill, pricing out there is going to come down and nobody is looking at interest rates moving at 25 bps one way or the other to determine that. So I think the answer for us is, Mark, do you have any color to add to that?

Mark Lamb

I would just say from a competitive perspective on buying, so a lot of our competitors are buying assets and taking them to HUD. As long as HUD rates stay low, it will impact, I’d say competition for buying. But from a leasing perspective, I think we feel we're about as low as we possibly can be.

Now, obviously just adjusting for coverage and every now and again there's a special asset or two that maybe you go below nine, because the potential coverage left once a specific operator is in there. Maybe it makes sense to in a specific market like the Bay Area that has the highest reimbursement in the country. But for the most part, I think we feel pretty good about kind of being in the 9% to 9.25% range and feeling like that's a reasonable risk-adjusted spread for us.

Todd Stender

That's helpful color. In the sense of maybe this doesn't apply where sellers have better alternatives to sale leaseback financing. Is that really not the case, because it is skilled nursing?

Gregory Stapley

Well, I think there's always been some highly competitive alternatives to refinancing out there for folks who had the wherewithal to do that, who could make the down payments. Hudson obviously is out there and it's been at rock bottom rates for years.

And yet we in the REIT’s have not – we've thrived. Yes, it's definitely competition to us. But an operator who wants to do that has to come up with a significant down payment. They have to wait a long time. They have to invest a lot of money on the front-end and we provide literally 100% financing, can do it in a short period of time.

And we also can bring those operators additional assets from more portfolio or from outside our portfolio as they want to grow. So it's definitely competition, but I don't think of declining interest rates overall are really making a big difference on it. Mark?

Mark Lamb

Yes. Todd, I would just add, we're not seeing a ton of traditional sale leaseback opportunities. I think most of what we're seeing on the market is, in our case purchase, put in a new operator. So oftentimes we bring an operator to the table and they have a sense of over where our pricing would be from a lease rate perspective versus maybe four or five years ago where you saw many more sale-leaseback to existing operator.

Todd Stender

All right, thanks for that. And then just I guess looking at G&A and unless I missed it. With G&A up in Q2, maybe just a reminder about, your incentive comp and how investment volumes kind of play a role in that? And then how often is that calculated? Did that play a role in G&A being up in Q2?

William Wagner

Hey, Todd. It's Bill. Yes. It does play a role in the total expense for G&A. In Q2, we had – well our three targets under our comp plan are leverage, investments and growth in FFO per share. And in Q2, we were up way over from Q1 and on our way to our annual plans. So we caught up on our call as it related to that performance. Over the remaining part of the year, I would expect that, it to be substantially lower than the 4.6 total G&A in Q2. Does that help?

Todd Stender

It sure does. Thanks a lot.

Operator

Our next question comes from Daniel Bernstein of Capital One. Your line is open.

Daniel Bernstein

Hi. Good morning. I guess on the West Coast.

Gregory Stapley

Good morning.

Daniel Bernstein

I would ask a somewhat different way on Texas. You alluded to cap rates being really specific, maybe state by state on Medicaid and we obviously know what happened in Texas on the provider tax. If cap rates are going up, are you inclined to add geographically to Texas or other states where operators are struggling?

Gregory Stapley

It's a great question. Our operators in Texas are not struggling. They're doing very well. As I include Ensign, PMG, Providence, Southwest LTC, Next Gen. I think we've always been very selective about the operators we put in and the opportunities we pair them with.

And we are looking – even though Texas is our second largest state in terms of asset concentration or investments. I don't think we're definitely a red lining in the state. There may be some great opportunities there as a result of this. And we are opportunistic investors and most of our operators are opportunistic and have opportunistic mindsets as well.

So we're not looking at it harder than we've ever looked at it. But we're definitely not turned off by what's going on over there. Most of our operators participate in the equip program. That really goes a long way towards bridging the gap that we're trying to bridge that the bed tax proposal that passed two legislative sessions. And otherwise if you make the right investment, there's still money to be made in a great state like Texas.

Daniel Bernstein

Yes. And I suppose making that the right price as well if cap rates go up. Well, the other question I had was you willing to review in the entire portfolio, and I guess it may be early in that stage. But where do you finding it frequent on the skilled nursing side? Where are you finding deficiencies that you may need to address or operators need to address? Is it on the labor side as much versus, again, maybe state by state Medicaid? Just trying to understand is there some single item that's kind of sticking out as maybe something that a lot of operators need to work on?

Gregory Stapley

Yes. Some of those answers are going to be highly state-specific. I mean, you've been Ohio, you look – we looked at what they're doing about their case mix index rates. In other places – in California, how are they doing on the QA scores and are they going to collect the QA at the end of the year.

So you really have to know a lot about the local business and what's going on in it. Then you really have to know a lot about what's going on inside these operations. That's why we're building Eric's team. Right now, there it is probably on the road, an average of three days a week.

And he spends that time in facilities, not just talking to the operators with talking to their staff. So he's on first name basis with a lot of the administrators in the buildings that we own. And that kind of hands on knowledge understanding is helps us to see all the little things out there that go into determining whether somebody's going to be successful or struggle going forward.

Daniel Bernstein

Okay. And one last question, with PDPM kind of infinite coming in October? Do you see any of the sellers that are potential sellers out there? Kind of holding on and waiting to see what will happen? Or, again, maybe any changes in kind of like the asking price in anticipation of PDPM?

Mark Lamb

Hey, Dan. It's Mark. I think that the general consensus is, I think some folks are waiting to see what the impact of PDPM will be. I would say looking at out pipeline. There's an operator that is – wanting to get out ahead us PDPM and is looking to sell. And but I would say the general sentiment in the market is potential sellers are kind of taking the wait and see approach.

Because if you think about PDPM really affects the buildings that are running a higher Medicare centers and not to say that mom-and-pops can't run a higher Medicare centers, but for the most part they're going to probably be running something a little higher on the Medicaid occupancy front.

So there may not be much change to them, it's a Q4, Q1 next year. In certain states, continue to get, increases in the Medicaid rate and so I think most other mom-and-pops that either talk to or are the investment brokerage community is talking to a lot of them are taking the wait and see approach just to see how cash flow will shake out as a result of PDPM.

Daniel Bernstein

Okay. I appreciate the color. And I'll hop off. Thank you.

Mark Lamb

Thanks.

Operator

There are no further questions. I'd like to turn the call back over to Greg Stapley for any closing remarks.

Gregory Stapley

Well, thanks operator. And thanks everyone for being on the call today. We appreciate the questions and the interest and if you have any additional questions we welcome a call or email and we'll be happy to help. So thanks.

Operator

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