CareTrust REIT Inc (CTRE) 2015 Q2 法說會逐字稿

Welcome to CareTrust REIT's second-quarter 2015 quarterly earnings call. Listeners are advised that any forward-looking statements made on today's call are based on the management's current expectations, assumptions and beliefs about CareTrust's business and the environment in which it operates.

These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financings, and any other matters, all of which are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied here. Listeners should not place undue reliance on forward-looking statements, and are encouraged to review the Company's SEC filings for a more complete discussion of factors that could impact results, as well as any financial or other statistical information required by SEC Regulation G.

In addition, CareTrust supplements its GAAP reporting with non-GAAP metrics such as EBITDA, adjusted EBITDA, FFO, normalized FFO, FAD and normalized FAD. When viewed together with its GAAP results, the Company believes that these measures can provide a more complete understanding of its business, but they should not be relied upon for the exclusion of GAAP reports. Except as required by federal securities laws, CareTrust and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, change in circumstances, or for any other reason.

Listeners are also advised that the Company filed its 10-Q for the second-quarter and accompanying press release this morning. Both can be accessed on the Investor Relations section of CareTrust website at www.caretrustreit.com. A reconciliation of net income to non-GAAP financial measures is available on today's press release. A replay of this call will also be available there until 5 p.m. Pacific on Friday, August 21, 2015.

At this time, I would like to turn the call over to Mr. Greg Stapley, Chairman and CEO of CareTrust.

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

Q2 was perhaps our busiest quarter ever, with four solid acquisitions completed in and at the end of the quarter. In addition, multiple potential acquisitions in our pipeline marched closer to completion, and we were very busy getting a couple of them under contract, due-diligenced and ready to close. Moreover, last week, we completed a significant refinancing, replacing our original $150 million secured term revolver -- which was somewhat unwieldy and difficult to use -- with a new $300 million unsecured credit facility that Bill will discuss in greater detail in just a minute.

The four completed acquisitions accounted for approximately $32.9 million in capital deployment, with a combined initial cash yield in the four acquired assets of approximately 9.3%. More important were the three outstanding new tenant operator relationships that we established with those deals. Every one of them is a best-in-class operator in their respective markets, and we expect that all of them will grow their businesses with us over time.

Finally, we announced two major events just this morning. First, we announced that the Company has $175 million 14-property skilled nursing and senior housing portfolio under contract, with diligence substantially complete and closing just waiting on final regulatory approvals. That investment produces a 9.6% initial cash yield, further diversifies us into a new state, and adds another outstanding operator, whom we expect will grow with us as well. Dave and Mark will talk more about that deal in just a moment.

Second, we also announced a follow-on offering -- a $175 million equity raise will primarily fund the aforementioned acquisition. Bill will talk about what the combination of the acquisition and an offering might do for our credit stats in a moment too.

For those of you who follow us closely, it goes without saying that these events put us well ahead of plan. In addition, I'm pleased to report that the acquisition pipeline is more robust than ever. We continue to source deals at attractive, if not compelling, risk-adjusted returns. And the new 14-property transaction is just one of several exciting opportunities, both large and small, that we are working on.

So, with that, I'd like Mark and Dave to add some details on as our recent growth and pipeline, and then Bill will provide some color on the Q2 financials and how current events might affect future quarters. Dave?

Thanks, Greg, and hello, everyone. Q2 was once again a solid quarter for growing our base of quality operators. Last quarter, we told you about Five Oaks Healthcare and the $9.3 million Mira Vista acquisition in Washington State. Since then, Five Oaks has brought us another very good deal -- Shoreline Health & Rehabilitation Center, a 105-bed skilled nursing facility in Seattle, which we closed in June.

Our $6.8 million investment there provides an initial cash yield of 9.8%, and strengthens our master lease of Five Oaks. And I'm pleased to report that Five Oaks continues to hunt great opportunities and bring them to us.

We also initiated a new relationship with Trillium Healthcare Group LLC, an outstanding and experienced skilled nursing operator based in Florida. Trillium leased Shamrock Nursing and Rehabilitation Center, a 105-bed skilled nursing facility located in Dublin, Georgia, which we acquired for $8.3 million right at quarter-end. That investment carries an initial cash yield of 9.6%. And we're looking at several follow-on opportunities with Trillium now, and hope to execute on those deals in the near future.

We are also excited about our new relationship with Better Senior Living Consulting LLC, a highly-regarded assisted-living and memory care operator based in Florida. We've put Better Senior Living into Bristol Court Assisted Living, a 70-unit, 115-bed memory care facility located in St. Petersburg, Florida, that we acquired on July 1 for $8.5 million. That investment carries a going-in cash yield of 8.5%, and we are already working on other deals with Better Senior Living.

And finally, we have long been courting a great operator out of Indiana -- Pristine Senior Living. Led by Chris Cook, a well-respected skilled nursing operator with more than 25 years experience, and his equally impressive clinical and financial partners, Pristine has assembled a great team of dedicated caregivers and business people who are making final preparations to step into the 14-property Ohio portfolio we announced today, which Mark will discuss in a moment.

Those are four important new operator relationships for CareTrust, each one with their prospect of significant expansion. These new relationships have come largely by word-of-mouth from our current tenants and other industry friends. 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. So, it will continue to be our highest priority going forward.

With that, I'll hand it to Mark to talk about our recent deals and the current pipeline. Mark?

Thanks, Dave, and hello, everyone. As Greg mentioned, we closed $32.9 million of new acquisitions in Q2 and since. These deals have contributed over $3 million in run rate rental revenue, and represent a blended average initial cash yield of 9.3%.

As you know, our core strategy is to string together a steady stream of relatively small deals at attractive yields to produce big results over time. And these acquisitions fit that strategy perfectly. We call that our small deal pipeline. And it's looking very good right now.

Today, we have a deal that is flowing through our so-called big deal pipelines. And while we don't normally announce deals before they close, the size of this one, coupled with the fact that we are doing some material financing around it, has compelled us to talk about it a bit earlier than normal.

On October 1, we expect to complete the acquisition of a 14-facility skilled nursing and assisted-living portfolio currently owned and operated by affiliates of Ohio-based Liberty Nursing Centers for approximately $175 million. The facilities are located throughout Ohio and are primarily concentrated around the Dayton and Cincinnati Metropolitan areas, with a few in other Ohio cities.

The portfolio collectively includes 1,102 licensed skilled nursing beds, 156 assisted-living and independent living units, and was 82.1% occupied as of May 31, 2015. In connection with the Liberty acquisition, we have entered into a triple net master lease for all 14 facilities with Pristine. The going-in rent from the Pristine master lease is $17.2 million, representing an initial cash yield of approximately $9.6 million after including estimated transaction costs of about $3 million.

Like all of our leases to date, the Pristine master lease will be triple net. The initial term is 15 years with two five-year renewal options. Rent escalates annually by the change in CPI with a 3% cap and a zero floor. Chris Cook and his business partner Steve Ryan have personally guaranteed the lease. They are currently filing change of ownership license applications for state approval, which is the principal final gating item before we close the deal.

In addition, at present, we have contracts and competitive term sheets out on multiple opportunities that collectively represent over $950 million in additional proposed transactions from 2015 and 2016.

The big deal pipe is almost $800 million, and the small deal pipe is currently right around $170 million. Needless to say, we are very excited about both pipelines, and more importantly, the outstanding new operators that we expect to grow with over the coming years. For the record, as we speak to you today, CareTrust has 107 properties in 14 states, and we are actively working with a variety of brokers, sellers, and operators to source additional opportunities for growth.

And with that, I'll hand it to Bill.

Thanks, Mark, and hello, everyone. For the quarter, we recognized $15.2 million in rental revenue, up from $14.8 million in Q1. For 2015, we expect to recognize $56 million from Ensign and $9.9 million from new investments closed, plus those announced to date, which includes Liberty for total expected 2015 rental revenue of approximately $65.9 million.

For the quarter, normalized FFO was $7.9 million or $0.25 per diluted common share, and normalized FAD was $8.8 million or $0.28 per diluted common share. Net income was $2.3 million or $0.07 per diluted common share. We expect 2015 NOI from our three independent living facilities to be approximately $200,000, and interest income to be about $900,000.

Interest expense was up slightly to $6 million for the quarter, relative to the prior quarter, and it includes approximately $555,000 of amortization of deferred financing fees. More on interest expense for 2015 in a moment.

G&A expense was flat at $1.6 million for the quarter. We expect G&A to grow over the remaining two quarters of the year compared to the first two quarters. It will be primarily driven by an increase in deferred stock compensation of approximately $300,000, as well as costs associated with more personnel as a result of us staffing up slightly to meet the demands of a larger portfolio and increased deal flow.

If you saw our release today, you know that in light of our current activities, we did not update our previously released guidance for 2015, but we plan to do so when the dust settles on our recently announced and current activities. After that, we do plan to continue updating guidance quarterly, primarily to account for completed acquisitions, financing, and infrastructure growth from quarter-to-quarter.

Turning now to the balance sheet, we ended the quarter with $29.9 million in cash and $35 million drawn on our line, because we are planning to deploy roughly $17 million for the July 1st acquisitions that Dave discussed, plus make deposits on some other deals. The $0.16 quarterly dividend we declared in June equates on an annualized basis to approximately 59% payout ratio on the midpoint of our previously announced 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. We were also excited last week to announce the Company's new $300 million unsecured revolving credit facility. The credit agreement includes a $200 million accordion feature, resulting in potential borrowing capacity of up to $500 million.

The interest rate on the facility is LIBOR plus 1.75% to 2.4%, depending upon leverage, with an unused fee of 0.15% or 0.25% per annum, depending upon usage. In addition, if the Company's senior long-term unsecured debt receives an investment grade rating from either S&P or Moody's, we can elect to further reduce the interest rate. The line has a four-year tenure and includes two six-month extension options.

The value of this line to us at this stage of our development cannot be overstated. The secured line it replaces was complicated and covers some TEUs, but this line is very easy to administer. As Greg noted in last week's press release, this new unsecured credit facility not only represents a significant vote of confidence from the financial community, but better aligns with and facilitates our ambitious growth and investment objectives.

Pro forma for the Liberty acquisition and the pending follow-on, we expect it to give us around $200 million in total availability with room to grow. As for our evolving credit metrics, among other things, the pending liberty acquisition will diversify our revenue stream among more operators.

For example, on a current annualized run rate basis, prior to Liberty, we derive approximately 84% of run rate revenues from Ensign, but that concentration decreases to approximately 67% of run rate revenues pro forma for Liberty. In addition, by funding the acquisition in whole or substantial part with the net proceeds of an equity offering, we would be able to, among other things, materially reduce our leverage profile. We believe that such a change in our credit profile may aid us in eventually improving our public debt rating, and thereby materially reduce our cost of capital over time.

Pro forma for the Liberty deal and a hypothetical equity raise in the $175 million range, our net debt to EBITDA will go from 6.8 times to approximately 5.4 times. Debt to enterprise value would go from 50% to about 42%, and our fixed charge coverage ratio will go from approximately 2.6 times to 3.3 times.

All of this depends, of course, on whether and exactly how much we might raise in an offering and at what price. But you can see that the two events together would really move the dial for us.

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

Thanks, Bill. To wrap up, please remember that Q3 will look pretty choppy with the additional shares going out in the offering and the proceeds waiting until October 1 to be deployed. But we couldn't be more pleased with the long-term prospects for the Company and all the good things this quarter's accomplishments do for the rest of our year and beyond. We will update you on all of that again soon.

We have a solid and growing rent stream, an enviable portfolio with true best-in-class tenants, and abundant opportunities to grow -- and we are growing. We hope this discussion has been helpful. We are obviously excited about both our near-term and long-term prospects and we are grateful for your continued interest and support.

Because this call is pre-recorded, and because we will, today, be fully engaged with the matters we've discussed, we won't be able to have Q&A today. But we encourage you to look at our recent public filings and press releases for more information on these things.

And we look forward to seeing many of you very soon. Thank you and have a great day.

Ladies and gentlemen, as a reminder, there is no Q&A session on today's call. This does conclude the program. You may all disconnect. Everyone have a great day.