CTRE
#Thanks, Dylan.
Good morning, and welcome, everyone.
Billy here ---+ with me are Bill <UNK>, our Chief Financial Officer; Dave <UNK>, our Vice President of Operations; <UNK> <UNK>, our Director of Investments; and <UNK> <UNK>, our Director of Asset Management.
We've been very busy since the quarter began.
Nearly a year's worth of hard work has produced over $200 million in new investments in Q3 and since, bringing our total year-to-date to a record $300 million-plus and pushing our enterprise value north of $2 billion for the first time.
Most importantly, the groundwork we've been laying all year for future growth has produced some tremendous fruit with projected normalized FFO per share for the fourth quarter, jumping from $0.28 to $0.31 to $0.32 on a sequential basis, which equates to $1.24 to $1.28 going into 2018.
On the asset management front, lease coverages with several of our newer operators had been rising nicely, partly as a result of our asset management team's efforts.
And we've resolved the only significant problem in our portfolio.
Specifically, we are pleased to report that we've implemented a meaningful long-term solution to the challenges we've been talking about over the past 9 months with respect to our 16-property Ohio portfolio.
Since the initial property tax payments earlier this year, Pristine Senior Living has been the subject particularly intensive asset management work.
As a result, Pristine has been showing steady and, we believe, sustainable operational improvements since late spring.
Nevertheless, in pursuit of a more definitive solution for the portfolio, we've agreed to give Pristine some short-term rent relief, which will immediately improve our lease opportunity with them.
In exchange, they have agreed to relinquish 7 of the 16 properties and start stepping the rent back up in the coming months and years.
The 7 properties will be transferred to our existing tenant, Trillium Healthcare, the successful operator of our assets in Georgia and parts of Iowa.
These changes position our Ohio assets for better success as the 2 operators focus more closely on a smaller subset of the assets and the improvement opportunities that they still contain.
Moreover, the deal lowers our exposure to Pristine from 15.1% to just 7.7% over our September 30 run rate revenues, offsetting Trillium of about 9.5%, and those percentages have declined further with our Q4 acquisitions.
Both tenants are excited about the future prospects with these assets, as are we.
It's important to note that while the near-term cash rent reductions will total around $2.2 million over the coming year, due to the effects of GAAP straight lining, these transactions do not significantly impact the rental income we will record this quarter and over the next few years.
Plus, our yield on the overall Ohio investment is still a GAAP normalized 9.6%, and the going-in pro forma lease coverage from Pristine will be about 1.25x on their first year cash rent versus their T3 annualized EBITDAR, assuming no additional operational improvements.
For Trillium, the going-in cash ---+ the going-in coverage will be about 1.22x of their initial cash rent for 7 facilities and 1.3x on their overall portfolio with us.
While we hate to give up the short-term cash rents, we couldn't be more pleased with the long-term solution here.
We recognize that all real estate investors, ourselves included, will experience problems once in a while, but it's not whether you'll have them but how you'll handle them that counts.
The Pristine resolution is an example of the kind of creative solution that we, with our deep understanding of our tenant operations, can craft when true challenges arise.
And as I mentioned, while all of this was underway, we were still able to close a number of great new properties and set yet another annual record for investments, plus we started loading the pipeline for 2018 as well.
I'd like the team to tell you more about that and more, and so I'll turn it over to them now, starting with Dave.
Dave.
Thanks, Greg.
So as Greg mentioned, in Q3 and, thus far, in Q4, we've closed on $214 million of investments at an average net yield of 9.04%.
All of these acquisitions were true to our strategy of placing facilities in stronger hands, operators who can give the time and attention needed to provide sustainable, clinical and financial excellence.
The majority of the deals were with current CareTrust's operators as tuck-ons to their existing master leases.
Our operators are excited about these opportunities because each facility we acquired has a clear operational upside with a potential to immediately, or in the near term, strengthen their master lease coverage, expand their local market share or open new markets.
And in every case, materially enhance their bottom line.
We were also fortunate to bring a new operator into the portfolio with the sale-leaseback deal in California we've closed just a couple of weeks ago.
Providence Group, a thriving and effective skill nursing company led by industry veterans, Jason Murray and <UNK> Hancock, has a special mix of clinical and financial sophistication and the cultural commitment to its employees, residents and patients that are prerequisites for us and the new operator.
With over 40 facilities in California, Indiana and Kentucky and tremendous individual track record as successful operators, the Providence team is doing an outstanding job of delivering quality clinical outcomes while running a profitable and promising organization.
We look forward to helping them grow for years to come.
On the regulatory front, the skill nursing sector is gearing up for a new Department of Health annual survey process that is supposed to be implemented next year.
We don't expect that our operators' financial performance will be materially impacted, but as part of potential implementation, all existing star ratings nationwide are supposed to be frozen for a year, which will temporarily benefit some and frustrate others if implemented.
And along with our operators, we continue to monitor the proposed change from a rehab utilization-based model of Medicare reimbursement, or RUGS, to the proposed patient characteristic-based model called RCS 1.
That proposal has yet to be finalized.
So with that, I'll turn it over to <UNK> to talk about the acquisition landscape in general and our pipeline, in particular.
Thanks, <UNK>.
For the quarter, we are pleased to report that normalized FFO grew by 29% over the prior year quarter to $21 million, and normalized FAD grew by 30% to $22 million.
Normalized FFO per share was flat at $0.28, and normalized FAD per share was down $0.01 to $0.29.
Given our most recent dividend of $0.185 per share, this equates to a payout ratio of 66% on Q3 normalized FFO and 64% on normalized FAD, which again represents one of the best covered dividends in the health care REIT sector.
Before I go on, let me walk you through the amended rent schedules with both Pristine and Trillium that Greg talked about.
Bottom line, our rental revenue for Ohio changes from $18.6 million pre-deal to $18.4 million post.
Let me explain the details.
Pristine's new rent schedule contains multiple fixed bumps over the first 21 months.
And then beginning on July 1, 2019, their annual CPI bumps of at least 2% each year over the remaining term.
Trillium's amended rent schedule contains multiple fixed bumps over the first 2 years and then grows annually by CPI beginning on December 1, 2019.
If you look at our supplemental and compare just the line items for Pristine and Trillium, you see that the aggregate initial cash rent drops about $2.6 million from $18.6 million to $16 million.
But this is based on the first month's contractual cash rent, which only lasts a few months before starting to bump up.
On a cash basis, year 1 cash rent for all of Ohio is now $16.3 million, year 2 is $17.4 million, year 3 is $17.6 million, and each subsequent year increases by about $200,000, plus whatever the CPI bumps are on the Trillium portion.
Straight lining these fixed bumps results in GAAP rents in all future years of $18.4 million compared to prior contractual rent of $18.6 million before the deal.
We also referenced in our 10-Q approximately $6 million in impound accounts and $750,000 in other deferred rent amounts that Pristine will begin paying back to us starting in October 2018 with interest.
The impound receivable relates to property and bad taxes that we pre-funded into the impound account starting in Q1 of this year.
The $750,000 of deferred rent is just under half of September's rent and represents the only contractual cash base rent that Pristine has not paid to date.
Pristine has paid all of October base rent under their amendment and is current on November's base rent.
Now on the guidance, which takes into account these changes.
We have revised upward our 2017 guidance and now expect net income per share of $0.51 to $0.52, normalized FFO per share of $1.16 to $1.17 and normalized FAD per share of $1.21 to $1.22.
This guidance includes all investments and all shares issued under the ATM to date, is based on a weighted average share count of 72.9 million shares and includes the anticipated effects of the Pristine and Trillium lease amendments as if the planned transfers had occurred on December 1, as scheduled, and relies on the following assumptions: one, no additional investments nor any further debt or equity issuances this year; two, no rent escalations for any of our leases beyond those made to date.
Our total rental revenues for the year, again including only in acquisitions made to date are projected at approximately $117 million to $118 million and includes approximately $630,000 of straight line rent; three, our 3 independent living facilities are projected to do about $500,000 in NOI this year; four, interest income of approximately $1.9 million; five, interest expense of approximately $24.5 million.
In our calculations, we have assumed a LIBOR rate of 1.25%.
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 rates on our revolver and term loan.
Interest expense also includes roughly $2.1 million of amortization of deferred financing fees.
And six, we are projecting G&A of approximately $11.2 million to $11.4 million.
Our G&A projection also includes roughly $2.4 million of amortization of stock comp.
This all results in Q4 guidance of $0.31 to $0.32 per FFO and $0.32 to $0.33 per FAD on an annualized basis going into 2018, $1.24 to $1.28 per FFO and $1.28 to $1.32 for FAD.
As for our credit stats calculated on a run-rate basis as of today, our debt-to-EBITDA is approximately 4.49x, but our net debt-to-EBITDA is approximately 4.34x.
Leverage is about 28% of enterprise value, and our fixed charge coverage ratio is approximately 5x.
We also have almost $20 million of cash on hand.
And with that, I will turn it back to Greg.
Thanks, Bill.
We hope this discussion has been helpful.
We thank you again for your continued support.
And with that, we'll be happy to answer questions.
Dylan.
Sure, <UNK>.
Thanks.
This is Greg.
So you might remember the story.
We've been telling it for a good solid year now.
Pristine, when they came out of the gate, were in the process of building up their back office to accommodate the 16 facilities that we gave them.
Their CFO was at the center of that.
In the middle of that process, you might recall that his wife contracted cancer and he was missing in action, understandably, for quite some time.
She ultimately passed away, and he ultimately resigned from the company.
In the midst of that, Pristine was in ---+ was attempting to shift what was largely ---+ when we acquired them a set of pure Medicaid shops to more of a short-stay rehab model, and doing so without the benefit of good, solid real-time management data and financial data, which was a very, very difficult thing to do.
Then we came back and just said to the market, look, we think that ---+ we always predicted there was going to be some decline in their operations as they went through that transition before it started going up, and then that decline started to become prolonged in the midst of that.
They sort of dug themselves a bit of a whole when we started the tax impound account last spring.
And with that, our asset management team stepped in and started helping them to identify the opportunities in their portfolio to improve their operations.
And those improvements have borne through.
They ---+ starting last May, they've steadily improved each month.
In the midst of that, their Medicaid rate in about 1/3 of the portfolio, a little over 1/3 of the portfolio, went down in 2016 rebasing, that was in the Cincinnati area, to the tune of about $12 to $15 a day in some cases, which was difficult and additional setback.
And ---+ but the operational improvements that they started making this year really started to help quite a bit to the point where by the end of this past summer, things were looking pretty good for them across the portfolio.
Nevertheless, they're still trying to dig out some of that hole and came and asked us if we would consider some short-term rent relief.
We were willing to do that but not while they were still 15% of our total overall rental revenue.
And so we struck a deal with them where they got the rent relief but we got half the buildings, or almost half the buildings back.
And we were able to hand them to another operator that was anxious and ready and willing and able to come in.
That's Trillium.
In the midst of all that, we also reset their ---+ when we reset their rent, we reset it with some minimal fixed rent bumps in future years, which now has that rent stream being straight line such that our income, short-term, isn't impacted very materially, at least on a GAAP basis.
And so we think it's a win-when all the way around.
With respect to Trillium, these guys are great operators.
They've done a terrific job in the portfolio that we have with them in Georgia and Iowa.
They ---+ those are not the only assets that they have.
They're industry veterans.
They are actually ---+ I spoke with Pristine just this morning.
They are out of the road with Trillium guys right now in the 7 buildings that are going to be transitioned, introducing the Trillium team to the staff in the community and making sure that, that transition goes smoothly.
So everybody's working together well.
We end up with no tenant in our portfolio besides Ensign, with more than 10% of our revenue, and we think it's, as I said, win-win all the way around.
Does that answer your question.
We've always ---+ we love Ensign.
We talked to you, the new high today.
They're a great example of why the sky is not falling with respect to skilled nursing.
Yes, there are pockets of weakness across the industry, but Ensign has always been able to ---+ even in its most difficult times, and everybody has challenges, they've always been able to rebound and do ---+ stick to the fundamentals that make a nursing company successful.
We would be thrilled to do more work with them.
And I think while we have been actively working to push that tenant concentration down, we've always said from the very beginning, when we were 100% Ensign-concentrated, that if the right opportunity arose and they were the right partner for it, we would absolutely do that deal with them, assuming they wanted to.
I'm going to let <UNK>, our Director of Asset Management, talk about that.
He's been in those buildings a lot lately.
I'll add one thing to that, <UNK>.
One of the benefits of having a better back office and CFO in place now is that they have been able to get a little bit more visibility into their operations on a day-to-day basis.
And one of the critical things that we've been concerned about that they've finally figured out is their bad debt expense.
They've been running bad debt expense of 2% versus an industry average of, say, 1%.
Ohio averaged probably about 1% as well.
And it's always been a bit of a head-scratcher for us.
And they've now come around and figured out where the problems where and are actively making moves to address that.
So if they can get that leg, that is huge going forward.
And the coverage numbers we've given you still reflect the 2% bad debt calculation.
So we think there's still some really good upside in this portfolio as they continue to short things up, and it could run more efficiently.
Well, they actually didn't need to bring more people to ---+ and ramp up their cost structure.
But during that prolonged period when they were down, they did dig themselves a bit of a hole and were behind some of their vendors and other things, and they just felt like they needed to take a step back in order to move forward again.
Say that again.
I'm sorry I didn't catch it.
We're not.
We still like CPI rent bumps.
And our rent bumps have always been bracketed with ---+ by a 0 floor and a 3% to 3.5% cap depending on the deal.
In Trillium's case, they have a rent bump on this piece of the portfolio, one coming in the year, and then it basically goes to CPI after that.
We had to sort of mill their existing rent stream and the anticipated escalators, and that went with the new rent stream on the 7 facilities, and so we ended up structuring a 2-year sort of rent schedule.
But after that, it goes back to the CPI with 0 floor and 3% cap.
With respect to the Pristine piece, the 9 facilities they're retaining, it was important to us to put in the 2% floor on that piece of the portfolio because the initial cash discount that we were giving them was meaningful.
It's meaningful enough to help them with the hole that they were in as well as ---+ but we wanted to be able to recognize the income that we were going to be getting back over time, and so we've put in that 2% floor.
And it has a 3% cap as well.
Yes.
There was no activity in the past quarter, and that was mainly due ---+ even though we knew the pipe and some investments were coming to close, we didn't feel real comfortable issuing shares under the ATM given the negotiations that were going on between us and Pristine.
We would like to keep ---+ yes, we would like to keep at the lower end of our stated range of 4 to 5x.
And now that all the disclosure is out, and this ---+ we have the amendment signed, and with Pristine, you can expect the ATM to be turned back on.
Thanks, Dylan.
Thanks, everybody, for being on.
We appreciate your time and interest and welcome you to call us if you have any further questions that we can answer.
Take care.
