CTRE
#Thank you, Sarah.
Good morning, and welcome, everyone.
It's been a busy year so far here at CareTrust.
We've completed $47 million in acquisitions, increased our dividend by more than 10%, welcomed 3 new tenants into the fold and completed the retenanting of a number of great assets.
We are increasing our guidance, and after resolving a couple of tenant issues, we are again turning our full attention to the business of getting back on the growth trajectory that we've been accustomed to.
Retenanting any operating health care asset in an orderly matter is always a significant challenge.
But in the case of Pristine and OnPointe, we did so without delay, maintaining both the value of the assets and the integrity of the rent stream in the process.
Among other things, it was our team's deep understanding of skilled nursing in general and our close familiarity with day-to-day operations with these facilities specifically that allowed us to transition the operations quickly and smoothly.
In the case of the last 9 Pristine assets, we placed those into the hands of Trio Healthcare and Hillstone Healthcare, 2 separate operators about whom we're very excited.
I'll let Dave discuss these promising new operator relationships in a minute.
With respect to the 2 assets formerly leased to OnPointe, the decision to retenant could have gone either way.
You'll recall that we purchased those assets mid-last year with the OnPointe leases in place.
The buildings were new, well-located and doing well in lease-up, and they were extremely well-priced.
In addition, we were pleased to have OnPointe in CareTrust's fold, even though we knew that they were facing some challenges in their organization, which might eventually affect our 2 assets.
So we evaluated that risk against the value of the deal, prepared for it and went in eyes wide open.
Recently, as a result of those continuing challenges, we had the opportunity to open a conversation with OnPointe about the long-term relationship.
Based on those conversations, we agreed that the best course was to transfer the operations to other operators, and that transition was completed on May 1.
We placed the 2 properties into our existing master leases with Providence and Eduro, doing so without any rent leakage.
These are very nice and very recent vintage assets.
In fact, the Albuquerque asset is so nice, we put it on the cover of our supplemental this quarter.
And both operators are excited to have them.
As I noted, the transitions went smoothly, in large part due to OnPointe's professionalism and cooperation, and we look forward to possibly reopening the conversation with them in the future.
As we close the chapter on the Pristine experience, you might guess and you would be correct that we've done some serious self-examination around our vetting process for new operators.
There have been plenty of takeaways, which we have used to expand and sharpen our underwriting processes that Dave and <UNK> will discuss in a minute.
We've also applied what we've learned as we continue building our unique brand of asset management.
Perhaps most importantly, we have proven our ability to address occasional tenant difficulties swiftly and productively and to bring you solid solutions, not just problems.
So we look forward now to a bright 2018 and beyond and pledge to continue making solid investments with top flight operators at superior returns.
With that, Dave will address our operator relationships and some broader industry developments, then <UNK> will provide details on our growth and pipeline, and Bill will conclude with the financials.
Dave.
Thanks, Greg, and good morning.
One of the happy byproducts of transitioning the remaining Ohio portfolio to Trio and Hillstone is a significant upgrade in operating capabilities, not only for these facilities, but also for future growth opportunities with these great operators.
So let me just take a second to introduce you to them.
Trio Healthcare currently operates 19 skilled nursing and seniors housing facilities in Virginia and Ohio.
Trio's name is a nod to the 3 cofounders: <UNK> Rubenstein, CEO; Boyd Gentry, CFO; and Melissa Green, Chief Clinical Officer, who, combined, have several decades of broad and deep industry experience.
They know how to combine big company systems with the granular, hands-on touch, and they're committed to creating a vibrant culture of compassion and accountability.
We look forward to seeing Trio realize the untapped potential in the 7 central Ohio facilities they took over.
Hillstone operate its 22 facilities across Ohio and is headed by Paul Bergsten, a longtime Ohio operator.
Paul is well-known and well-respected throughout the state for running high-performing, caring and efficient facilities, many of which are run as predominantly Medicaid facilities.
Paul knows these markets very well and has been warmly received by the staff, several of whom have worked with him in the past.
Hillstone is growing and in demand because they understand the business and have a proven track record.
So both companies scored very well on our operator scorecard, and both moved quickly with us to take over operations by May 1.
We're confident that the lease coverage for this part of the portfolio will be much stronger 12 months from now.
As for the prior transition in Ohio, you'll recall that Trillium took over operations at 7 Southern Ohio facilities on December 1 and has been doing terrific job with the operations there.
They immediately captured significant cost savings from implementing the fundamentals of expense management and are now running efficiently.
We expect its census to decline as it has while Trillium negotiated new contracts with local health plans and sought a Medicaid waiver for its senior housing units.
That contracting was largely completed last week.
Those units are now filling with a waitlist, and we anticipate a steady ramp in their SNF census and skilled mix as well.
All 3 of these outstanding operators as well as the 2 that took over the former OnPointe operations scored very well on our proprietary operator scorecard, which has become a key element of our underwriting process.
The scorecard includes over 100 different data points, ranging from traditional credit metrics, staff turnover and other objective measures, to things like culture, the management team's battle experience and other soft or subjective measures that we know from our own operating backgrounds they make a huge difference in an operator's profitability and long-term success.
As <UNK> will discuss in a moment, we've used this scorecard to ferret out some interesting information about potential operators that would never be picked up in a traditional underwriting process.
And we've used that data to do a much better job of matching operators to the right kinds of assets and opportunities.
In addition, our asset management team continues to use them to periodically rescore and reevaluate our existing tenants to be sure nothing pops up that might portend problems down the road.
Finally, on a broader note, the industry received welcome news last week.
First, CMS confirmed a 2.4% increase to the Medicare rates, the largest net annual rate increase in years.
Second, CMS announced progress in changing the Medicare reimbursement model from the current volume-based program referred to as RUG, to a model called Patient Driven Payment Model or PDP<UNK>
PDPM is the new name for the previously proposed RCS 1 model that we had enthusiastically supported.
This model removes arbitrary thresholds from minutes of a therapy required for setting rates and allows more flexibility to operators ---+ sorry, so operators can provide care more efficiently.
Like with RCS 1, we're enthused by these proposed changes that are now scheduled for October 2019.
And with that, I'll hand it over to <UNK> to talk about the pipeline.
<UNK>.
Thanks, <UNK>.
For the quarter, we are pleased to report that normalized FFO grew by 25% over the prior year quarter to $24.1 million, and normalized FAD grew by 22% to $24.9 million.
Normalized FFO per share grew by 10% over the prior year quarter to $0.32, and normalized FAD per share also grew by 10% to $0.33.
Given our most recent dividend at $0.205 per share, this equates to a payout ratio of 64% on FFO and 62% on FAD, which again represents one of the best covered dividends in the health care REIT sector.
Before I go on to guidance, let me update you with respect to the accounting for Pristine.
As Greg discussed, we have transitioned Pristine out of the remaining 9 assets and put in 2 new tenants at cash rents approximating what Pristine was paying.
Pristine paid their rent through March 31, and we expect to collect April rent as we collect through all of the outstanding accounts receivable on Pristine's books after collections have paid off Pristine's working capital line.
After collecting through and paying April rent, remaining collections will go to pay any 2018 expenses such as property taxes and back taxes that Pristine does not pay.
After that, any remaining cash collections will be used to reverse the reserve that we took in the fourth quarter of 2017.
In our guidance for 2018, we are assuming that cash collections on the outstanding AR from Pristine will cover April rent and any 2018 expenses that Pristine does not pay.
But we are not reversing any reserve previously taken, although we do believe that a portion of the reserve may ultimately be reversed.
In yesterday's press release, we increased our 2018 annual guidance range for normalized FFO per share by $0.01 on both the low and the high end of our range to $1.26 to $1.28.
We also increased our guidance for normalized FAD per share to $1.32 to $1.34.
This guidance includes all investments made today, a diluted weighted average share count of 75.9 million shares and also relies on the following assumptions: one, no additional investments nor any further debt or equity issuances this year; two, CPI rent escalations of 2%.
Our total rental revenues for the year, again, including only acquisitions made today, are projected at approximately $137 million and includes approximately $1.2 million of straight-line rent; three, our independent living facilities are projected to do about $400,000 in NOI this year; four, interest income of approximately $1.3 million; five, interest expense of approximately $29.4 million.
In our calculations, we have assumed a LIBOR rate of 2%.
That, plus the current grid-based LIBOR margin rates of 185 bps on the revolver and 205 bps on the 7-year term loan, make up the floating interest rates on our revolver and term loan.
Interest expense also includes roughly $2 million of amortization of deferred financing fees; and sixth, we're projecting G&A of approximately $12.4 million to $13.3 million.
Our G&A projection also includes roughly $3.8 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 4.5x.
Leverage is about 35% of enterprise value, and our fixed charge coverage ratio is approximately 4.8x.
We also have $17 million of cash on hand today.
And with that, I will turn it back to Greg.
Thanks, Bill.
To sum up, I'm proud of the way the team has tackled our recent challenges and pleased to have those challenges behind us.
We are optimistic about our future and the future of the skilled nursing and seniors housing industries and look forward to continuing to grow CareTrust in an intelligent and measured way.
We hope this discussion has been helpful.
We thank you again for your continued support.
And with that, we'll be happy to answer any questions.
Sarah.
Yes.
So <UNK>, this is Dave.
So the operator scorecard that we use has about 100 data points on it, captures things from the really objective corporate credit things, the operating margins, the systems that they use and more soft subjective things as well, like the background of the leaders, their financial sophistication, their sophistication with the new trends on bundled payments and the data-driven approach that's needed.
So we cover a lot of ground.
And then, we've handed that off to asset management, and what they do is they take that and then they actually enhance it with more information that we have.
So we have done that for all of our operators.
It's an evolving process.
Asset management is continually adding more things as we find more data points to add to it.
They do.
And yes, and yes.
And the reason that's so helpful is, for example, as we've done the OnPointe change and we're able to look at our existing operators and decide very quickly who is the best fit, who is not just the best fit for this asset, but who is prepared as we look at their whole operation to move quickly and who fits those operations.
That's how we landed on Eduro and Providence.
Well, I think, 2 of us will take that one, <UNK>.
This is Greg.
First, I just want to remind everybody that the OnPointe situation was very different from the others that we've had, because we knew that there might eventually be an issue there.
We priced the deal based in part upon that, and then, we had a chance to prepare for them and work with them as they managed their way through some separate challenges that we knew they were having.
So we don't really count that one with the other 2.
But we take full responsibility for the other 2.
And then, I'll ask Dave to take the second half of your question.
Yes.
So just looking at the portfolio as a whole, right now, we feel really good about it.
And we'll obviously be paying close attention to the transition-building.
And as we have in the past, we'd let you know if there are any operators that we feel are at risk to making a rent payment.
And as of today, there aren't any.
Yes.
So ever since RCS 1 came out, we saw that as a real positive for the better operators.
It's going to give ---+ and PDPM has been lauded by everybody that I've heard so far as an improved version of RCS 1 because it gives ---+ it cuts down some of the reporting requirements and continues to give operators more flexibility in terms of how they deliver therapy.
So we expect that there's going to be some cost savings and, in some cases, material cost savings on the therapy side, which is a major expense as operators can be more efficient in the delivery of the needed care.
And therapy is certainly not going away.
It will always be an integral part of the delivery of care for these patients.
But not having the arbitrary thresholds of minutes that are required gives the flexibility to operators to just be much more efficient.
So yes, we see it as an overall plus for the better, more sophisticated operators.
And we ---+ not much more to say than that.
Yes.
So talking about terming out the debt on our balance sheet right now, we've got $200 million on the line, and we've got that $100 million, 7-year term loan that is prepayable without penalty today.
We could term it out via the high-yield market that we tapped last year.
We've looked at both 8- and 10-year tenors, both are which a little more expensive than what we've issued at last year.
So those are opportunities.
We've also got the ATM out there.
And given our share price today, we're feeling a lot better today than we were yesterday and the weeks leading up to this announcement regarding the cost of our equity.
<UNK>, this is Greg.
As Bill says, it just feels a heck of a lot better than it did a week ago.
But we've always been very careful about being disciplined on ---+ particularly on the equity front and doing our best to match fund our equity raises to our acquisitions.
It needs a lot of power in the math behind that discipline.
And so we will tend to lean that way.
On the debt side, I think there's an ongoing conversation here that we're going to have to do something with pretty soon.
Getting the transitions of these facilities behind us has been a very significant and time-consuming thing, as you might imagine.
And so we're now, with the conclusion of this call today, we'll be pivoting toward some of those things.
That's a great question, Mike.
We ---+ the pipeline, as <UNK> indicated, seems to be a little bit thin.
We've talked about that for a couple of quarters now that deal volume just seems to be down overall, and we continue to see that.
Although we are starting to hear rumblings as we get out and talk across the industry about a lot of pent-up supply that could be coming out in the second half.
So we're cautiously optimistic about that and looking forward to seeing some new deals.
And I think, just having our other issues behind us and the chance for more of us to look harder and beat the bushes a little more for those things should be beneficial to begin with.
So as far as relationship deals, we've always been relationship acquirers.
For us, it's always been about who's the operator first.
You've probably heard me say it before, but there are few assets that are so bad that a great operator can't turn around, and no assets that are so good that a trained monkey can run them.
And so we are always looking at operators.
That's why the new operator scorecard has become so, so important to us.
It's how it helped us dodge a big bullet last year when we thought maybe we were going to step into a group of assets with significant investment but just couldn't get comfortable with who the operator was.
And it's how we will continue to function even more in the future than we have in the past.
Does that answer your question.
Well, I think, everybody would probably have their own opinion or reason for that.
The one that's been offered to us that seems the most plausible is that the whole industry had kind of a rough ---+ hit kind of a rough patch in the past year, and a lot of sellers that would ---+ that might otherwise be coming to market now need a little extra time to sort of clean up their operations, clean up their P&Ls and recover some of the value that might have been lost through the choppy waters of 2017.
And so that makes sense, and I think we see good things on the horizon for operators.
And so that should free up some of the deal flow.
Yes.
I mean, we\
No, same old, same old.
Thanks, everybody.
We really appreciate you being on the call and your support today.
If you have any other questions, most of you know where to find us, and we're always happy to see you and to visit with you.
So take care, and we'll talk to you next quarter.
