CareTrust REIT Inc (CTRE) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to CareTrust REIT first-quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to Mr. Mark Lamb, Director of Investments. So you may begin.

Thank you, Saeed. Welcome, everyone, and thank you for joining us today. With me are Greg Stapley, our Chairman and CEO; Bill Wagner, our Chief Financial Officer; and by phone, Dave Sedgwick, our Vice President of Operations, each of whom will be providing commentary today.

We filed our Form 10-Q for the first quarter and accompanying press release yesterday. Both can be accessed on the Investor Relations section of our website at www.caretrustreit.com. A replay of this call will also be available there until 5 PM Pacific on Friday, May 15, 2015.

Any forward-looking statements made on today's call are based on management's current expectations, assumptions, and beliefs about our business and the environment in which we operate. 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 any undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results, as well as any other financial or statistical information required by SEC Regulation G.

In addition, we supplement our GAAP reporting with non-GAAP metrics such as EBITDA, adjusted EBITDA, FFO, normalized FFO, FAD and normalized FAD. When viewed together with our GAAP results, we believe these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A reconciliation of net income to non-GAAP financial measures is available in yesterday's press release.

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

Also, just as a reminder, our filings to date have included historical results based on the old pre-spin intercompany leases. Those rents increased significantly at the spinoff, so we caution that those comparisons -- that comparisons to those historical numbers are not particularly relevant to our current operating results.

And with that, I will turn the call over to Greg. Greg?

Thanks, Mark, and thanks to everyone for being on this call and good morning. As we approach our one-year anniversary as an independent company, we want to start actually by expressing our gratitude to the many people who have helped us make this first and admittedly very challenging year a success. I am sure this is very unusual, but we would like on this call to call out the great bankers at Wells Fargo who advised us on the spinoff and led our bond offering; folks at SunTrust who led our credit facility and recently helped us obtain commitments to upsize it; the brokers at Marcus & Millichap, Blueprint, Evans, Senior Living Investment Brokerage, CBRE, Jones Lang, Lancaster Pollard, Houlihan, Colliers and others who have been bringing us some really terrific deals; our wonderful board and our colleagues here at CareTrust and many, many others who just made this first year a success for us.

We are particularly grateful to our new tenants, each of whom we had talked about in these calls, and especially to our friends and former colleagues at Ensign who continue to prove that a healthcare company can have a big heart and be a clinical bellwether, all while turning in outstanding financial performance. We look forward to continuing to work with all of these wonderful people and companies as we head into our second year and are grateful for the participation that they have had in our success this first year.

Speaking of this first year, we are pleased to report to you that our business plan is absolutely on track. In our first year, we have been able to close roughly $60 million in new acquisitions, which is just over the pre-spin historical annual average for us back when we were at Ensign. If we count the other $33 million in prospective acquisitions we currently actually have under contract, and especially the new operating relationships those deals represent, it has been a great start for us, indeed. I will let Mark and Dave talk more about those in a moment.

So, with our inaugural year almost over and its challenges almost behind us, we are looking forward to a very promising 2015. But before we discuss the future, I would like for Bill to provide some color on the Q1 financials, and then we will have Mark and Dave add some details on our recent growth and our pipeline.

Bill?

Thanks, Greg, and thanks to everyone on the call for your time and interest in CareTrust.

For the quarter, we recognized $14.8 million in rental revenue, up from $14.1 million in Q4, due to investments closed in Q4 and Q1. For 2015, we expect to recognize $56 million from Ensign and $4.4 million from new investment closed to date for total rental revenue of $60.4 million. This is up from $600,000 from our prior call, due to our recent 9.5% yielding $9.1 million investment, which closed on April 1. By the way, Ensign rents continue to be well covered on an EBITDAR basis at 1.94 times for the 12 months ending December 31, 2014, up from 1.91 times at September 30 and approximately 1.85 times at the spin.

We continued to expect 2015 NOI from our three independent living facilities to be approximately $300,000 and interest income to be about $900,000. Interest expense was flat at $5.9 million for the quarter relative to the prior quarter and includes approximately $547,000 of amortization of deferred financing fees. We continue to expect interest expense to be approximately $24 million in 2015.

G&A expense was down $800,000 from the fourth quarter due to the bonus accrual made in Q4, offset by increased amortization of stock comp. You saw our release yesterday. You know that we have updated our 2015 guidance to take into account our most recent $9.1 million investment. For 2015 we now expect approximately $63.9 million in total revenues, exclusive of tenant reimbursements.

Again, interest expense and G&A projections remain unchanged with approximately $24 million in projected interest expense, assuming no draws on our currently undrawn revolver, and $6.2 million to $6.9 million in projected G&A. We are also projecting $0.98 to $1 in normalized FFO, $1.08 to $1.10 in normalized FAD, and $0.28 to $0.30 of net income, all on a per share basis. These ranges are all up approximately $0.02 since our last call, and these projections are based on diluted shares outstanding of approximately $31.6 million, which you will recall increased in December by roughly $9 million due to the special dividend. No additional acquisitions or dispositions made beyond those to date and exclusion of any future stock-based compensation.

Turning now to the balance sheet, we ended the quarter with $13 million in cash, down from $25 million at year end due to the 9.65% yielding $18 million investment that we made during the quarter and $4.0 million of dividends paid, offset by cash flow from operations. The $0.16 quarterly dividend we declared in March equates, on an annualized basis, to an approximately 59% payout ratio on the midpoint of our 2015 FAD guidance. We believe that this places CareTrust among the most conservative of our industry peers and provides meaningful assurances of our ability to pay a steady and growing dividend over time.

Our remaining cash as of today is roughly $7 million, which, with the $84 million currently available under our undrawn $150 million secured credit facility, gives us ample room to continue to grow. We can expand that $84 million by adding the investments closed over the past year to the line for an additional [$35 million] in potential liquidity.

And as noted in our press release yesterday regarding the recent exercise of a portion of our accordion, we have procured a commitment letter from the required majority of the lenders under our current credit facility to lend up to an additional $50 million for a total facility size of $200 million. The new commitment allows us to use the full $200 million under certain circumstances prior to collateralizing the draw with the properties acquired to be added to the line post acquisition. We did this because, in addition to the smaller deals that have been our bread-and-butter, we are actively pursuing investments that exceed our current availability. This commitment allows us to eliminate financing risk and strengthen our offers by making them noncontingent on financing, which we believe will help us win more deals of size if we want to.

With that, I will turn it over to Mark and Dave to discuss the portfolio and the pipeline.

Thanks, Bill, and hello, everyone. This is Dave Sedgwick. Q1 was a solid quarter for growing our base of quality operators. Bethany Rehab, the Denver Metro skilled nursing facility we bought in February, is leased to Eduro Healthcare. We have known the leaders at Eduro for years as both colleagues and as competitors during our time at Ensign. Eduro has a solid presence in Utah and Wisconsin and needed a capital partner to expand into Colorado. They have gotten off to a fantastic start here in Denver and are poised to continue to grow throughout the Mountain West.

Mira Vista, the suburban Seattle skilled nursing facility we acquired on April 1, is leased to Five Oaks Healthcare, a new startup led by two very experienced SNF operators whom we have also known and admired for years. We are thrilled to help proven, quality operators like them launch and grow their companies with quality assets and smart lease terms. Five Oaks is looking to grow throughout the Northwest, and we already have another skilled nursing facility under contract to add to their master lease, which they sourced and brought to us.

In addition to those two, we are pleased to report that yesterday we signed a master lease with a new skilled nursing operator who looked like they are straight out of character at Central Casting. What I mean by that is they are a smaller regional Company with solid leadership, deep experience, and an unwavering commitment to quality. They hit that sweet spot of combining big company systems, sophistication, and expertise, with a small Company family feel. We have one SNF under contract that will be released to them with more in the pipeline.

In addition to the SNF under contract with them, they have already begun bringing us deals that we are pursuing together. We look forward to telling you more about them after we close that deal. Those are three important new operator relationships for CareTrust, but Q1 is notable for the many other new relationships we've made with operators who are attracted to our By Operators, For Operators approach. Those new relationships have come largely by word-of-mouth from our current tenants and other industry friends and, in some cases, competitors who don't have the appetite for the smaller deals or smaller operators. Expanding our bullpen of premier national, regional and local operators in each asset class broadens our ability to grow whether by one-off deals or with larger portfolios.

Considering that we launched the REIT less than a year ago with zero deals in the pipeline, we are pleased with the new assets and its yields and police coverage that we have added to date.

So looking forward, we are very excited for the pipeline we are currently working on. 2015 is shaping up to be a great year for us. And with that, I will hand it to Mark to talk about our recent deals in the current pipeline. Mark?

Thanks, David, and hello everyone. As Bill mentioned, we closed $18 million of new acquisitions in Q1 and $9.1 million in early April. These deals have contributed $2.6 million of run rate revenue and represent a blended average initial cash yield of 9.6%.

As you know, our core strategy is to string together a steady stream of relatively small deals to produce big results over time, and these acquisitions fit that strategy perfectly. More important than the growth itself, the solid risk-adjusted returns on these one-off deals illustrates the power inherent in our business model.

As Dave talked about, we closed the two SNF transactions in and around Q1, a little more color on the transactions.

Bethany Rehab is a 170-bed skilled nursing facility in Lakewood, Colorado that we required for $17.95 million. The investment provides an initial cash yield of 9.65% on EBITDAR lease coverage of 1.30 times, producing initial annual lease revenue of $1.7 million. We don't have full quarter numbers yet, but as Dave stated, Eduro is off to a great start at Bethany after a couple months of operating there. We are already seeing lease coverages start to climb as we expected.

We closed Mira Vista on April 1, which was a $9.1 million acquisition for us. Mira Vista is a 94-bed skilled nursing facility located in Mount Vernon, Washington. The investment yields 9.5% at 1.26 times EBITDAR lease coverage, which generates just over $866,000 in annual lease revenue.

In addition to our core singles and doubles strategy, we continue to push through as noted on prior calls some larger deals on which we feel we can compete effectively. In doing so, we are being careful not to lose sight of the small deals that are our bread and butter, as Bill notes, or the underwriting standards that have generated our superior returns to date. We believe it is in our interest in the interest of our growing portfolio of great operators to compete for deals that will help them and us to grow our operational footprints in strategic locations at a faster pace, if possible.

With the challenging first year almost behind us, we are pleased with our approximate $60.4 million in deployed capital thus far and especially with the risk-adjusted returns we've been able to generate on those investments. At present, we have competitive term sheets out on multiple opportunities that collectively represent over $400 million in additional proposed transactions for 2015.

Needless to say, we are very excited about the pipeline, and more importantly, the operators that we expect to grow with over the coming years. For the record, as we speak to you today, CareTrust has 104 properties in 12 states with more to come. As Greg mentioned, are actively working with a variety of brokers, sellers and operators to source additional opportunities for growth.

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

Thanks, Mark. Thanks, everybody. To wrap up, we are pleased with our start and looking forward to a great 2015. We have a solid and growing rent stream, an enviable portfolio with a true best-in-class principal tenet, and abundant opportunities to grow. We've got deals in the pipe and, best of all, great operators gravitating to the CareTrust story.

We hope this discussion has been helpful. We want to thank our shareholders, again, for your confidence and especially your patience throughout this first year. We are obviously excited about both our near-term and long-term prospects and are grateful for your continued interest and support.

And with that, we will be happy to take and answer your questions. Saeed?

(Operator Instructions) Chad Vanacore, Stifel.

Can you -- just thinking about this new relationship that you have under contract, can you give us a little more color maybe on the approximate size of the operator and maybe how many facilities we are talking about?

Dave, why don't you take that one?

Sure. They have about -- roughly eight to 10 facilities. Right now they are on track to -- they are growing with us very well, and they currently have some buildings in the Midwest, but are really able, because of their experience and system, they can grow really into any new market as long as there is a room big enough to justify it.

So that is what's really exciting about these guys. When we say they are straight out of central casting, that is kind of what we mean, where even though they are pretty small in size, they have been there and done that for decades in the industry. And if there is a platform deal in a new state, if we don't have an operator in that state already, we feel confident in taking it to them and helping them open up a new market.

Okay. So it's fair to think about them as small but growing. Do they rent all of their current real estate or do they own some of that?

They rent the majority of their real estate right now.

All right. So let's talk about maybe the pipeline that you mentioned. It looks pretty full. You upsized it from $350 million to $400 million of deals that are under evaluation. Can you -- if you can give us a type of maybe a split of assets and geography that we are looking at there?

So the geography for that is nationwide, literally. The assets tend to lean a little more heavily to the skilled nursing side. But if you have made any assumptions about us with our skilled nursing backgrounds being only on the skilled nursing, you will have to put those away. Because of the deals we actually have under contract, three to four of them are seniors housing deals right now. If you look back last year, the first four deals we did were all outsourced seniors housing deals, and they were all done at yields with eight handles at least on them. We are happy to have a lot of skilled nursing in that $400 million.

And by the way, let me just explain what -- because I don't think there is any kind of industry-standard for what people call or how they calculate their pipeline. The pipeline that we've quoted to you last quarter and this quarter is based solely on stuff that we actually have legitimate term sheets out on. It's not just stuff that we looked at or are looking at or that people want us to look at. This is stuff that we really have actually done some work around -- enough work around to actually put an offer on paper and send it out. So, it doesn't necessarily mean that those offers have been accepted, but these are deals that are real and that we believe we can be in legitimate contention for.

All right. And fair to think about these as mostly just singles and doubles rather than any kind of portfolio-sized acquisitions in there?

It's a combination, Chad. As we talked about on our last earnings call, we have started out with this core strategy of pursuing singles and doubles and cobbling together a large portfolio out of one-offs like we did at Ensign. But, we have not turned our back on the portfolio deals. So now, we sort of talk about our small deal pipe and our big deal pipe, and there are a couple larger portfolios in that number.

All right. And then, last question probably more for Bill, how should we be thinking about your target leverage?

I think our -- from a target leverage standpoint, we've historically talked that over time we would like to lower that leverage to around 30% to 40% debt to enterprise value.

All right. Thanks for your time today.

(Operator Instructions) Duncan Brown, Wells Fargo.

Forgive me if I missed this, but $33.3 million of acquisitions that you disclosed were under contract, how should we think about the probability? Are those done deals that just have not closed yet, or is there some risk that that won't come to fruition?

There is always some risk that those won't close. I have a mantra that I tell the guys whenever a deal dies 3 times. But those are actually under contract, and either in or working -- they are in some stage of due diligence, licensure, those types of things that have to be done before they can be closed. If you are looking to sort of time the revenue from those, I can tell you that three of them will probably close either at the tail end of the second quarter or near the beginning of the third. One of them is probably a little bit further off and probably wouldn't close about $10 million of it before the tail end of the third quarter at best. But they are real deals, and I don't -- we don't anticipate having any problem getting them closed.

Okay. Great. That is helpful. And then maybe going to the dividend, dividend payout ratio, 59% of 2015 FAD, and you kind of stated in the script it is relatively conservative. I wonder if you could give us your thoughts -- your thought process on how you got there, and if there might be -- what would need to happen for you to become more aggressive on that front and change that ratio?

Well, we are taking a conservative approach right now, Duncan, on our dividend strategy for a couple of reasons. One, we have a lot of acquisitions in the pipeline that we can deploy that capital at -- these investments that are yielding greater than 8.5% and 9%. And one is, call it, a recent startup Company. Our G&A is in a lot of flux. It's not like a more mature Company where the G&A is very consistent or slightly growing over time. We've had some lumps like in Q4 where our G&A jumped because an accrual made. So we just want to take the conservative approach so we ratchet it up over time as opposed to having to go up over time, cut back. So an annualized basis, it needs something on a reasonable payout ratio.

Yes, I think we want to keep that payout ratio in line with our peer group, while at the same time conserving some capital for growth if we can.

We also want to keep it at a spot where people don't have to worry about whether that dividend is coming next quarter or not. So we figure that being at the bottom of the list in terms of our payout ratio, but just barely, is a great place for us to be.

Okay. Great. That's helpful. Thank you.

I'm showing no questions at this time, gentlemen. I would like to hand the conference back over for closing remarks.

Well, that's it. Again, thanks, everybody, for being on the call. We appreciate you and your interest. We are here and able to answer questions on site if you ever want to give us a ring. We try to be accessible, and we are just looking forward to a great Q3 and a great 2015. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect, and have a wonderful day.