CareTrust REIT Inc (CTRE) 2015 Q4 法說會逐字稿

Welcome to the CareTrust REIT's year-end 2015 earnings call. Listeners are advised that any forward-looking statements made on today's call are based on 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, financing, and other matters, all of which are subject to risk 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 more complete discussion of factors that could cause -- 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 to the exclusion of GAAP reports.

Except as required by federal securities law, 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, changing circumstances, or any other reason. Listeners are also advised that the Company filed its 10-K for 2015 and any accompanying press release yesterday. Both 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.

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

Thanks, Kevin. Good morning, everybody, and thank you for joining us today. With me on the call today are Bill Wagner, our Chief Financial Officer; Dave Sedgwick, our Vice President of Operations; and Mark Lamb, our Director of Investments. We want to keep this fairly brief and mostly just give you some color on our quarterly business climate we see in general. For the numbers and other details, we of course encourage you to look through the K and our press release from yesterday.

Q4 was a breakout quarter for CareTrust. On October 1 we closed the $177 million Liberty-Pristine deal, with its going-in cash yield of over 9.5%.

That closing fielded another piece of the puzzle for us, which began with conversion of our old revolver from a $150 million secured line to a $300 million unsecured line and continued with our first real equity offering, which raised roughly $160 million, and the substantial transformation of our balance sheet. Since then we've used that platform and liquidity to continue pushing on the flywheel, and we've just upsized our unsecured revolver to $400 million, with another $250 million accordion if we need it.

We've replaced almost $100 million of previously nonprepayable high interest rate legacy secured term debt with $100 million of low-rate seven-year unsecured term debt, which will drop around $1.3 million to our bottom line this year. And we closed additional deals with high going-in lease yields that we expect will provide superior returns for years to come.

I'm once again pleased to report these results have catapulted us toward our long-term goals well ahead of schedule, placing us in a position of real strength for the coming year, despite the choppy markets. In fact, in January we boosted our existing shelf registration to $750 million in order to facilitate both our long-planned at-the-market program and to leave plenty of room to raise additional equity capital for growth if we need it and market conditions allow.

So, while we have no immediate plans to sell equity in the current markets, we will be ready if, as, and when prudence and pricing dictate. We certainly have no shortage of superior acquisition opportunities; and our expanded liquidity, coupled with a steadily increasing pool of quality targets, is allowing us to both be highly selective and to press pricing as we initiate new deals in what has started to look like more of a buyer's market for 2016.

With the new tenant relationships and investments we've made to date, we're now generating over $84 million in annual run-rate rental revenue. This represents a 51% increase from the $56 million in annual rental revenue we started with just 20 months ago.

With our growth and balance sheet improvements, we have also received upgrades in our credit outlooks from both Moody's and Standard & Poor's in recent months, and we hope to improve our credit ratings with them in the near term. Our dividend remains one of the best covered -- if not the best covered -- in this space, at 62% of FAD, which leaves us around $22 million to $24 million in free cash flow each year to redeploy in order to move returns further while strengthening the balance sheet even more.

So with all that, we remain optimistic about CareTrust's future. All the REITs have been hit hard in the current market, but we're excited about the fact that our banks have shown great support for our credit, our investors have shown consistent interest in our equity, and at our size we really don't have to raise equity or chase megadeals in order to move the needle significantly in 2016.

With that I'll turn it over to Dave to briefly talk about our recent deals, then Mark to discuss the pipeline, and finally to Bill to discuss the financials. Dave?

Thanks, Greg. Let me just open my part by congratulating our primary tenant, Ensign, on another record year and quarter. Ensign is now down to 64% of our run-rate revenue, and we're pleased to have their solid leases, which cover at more than 2.05 times of the facility-level EBITDAR.

We remain especially impressed with how they are leading the way on adapting to the ever-changing reimbursement environment and using the current evolution toward more managed-care and other value-based payment systems to capture market share and improve patient outcomes. They continue to be the standard for us as we seek and evaluate other great tenants to operate our growing portfolio of healthcare assets.

As experienced operators ourselves, we focused on partnering with people who combine the requisite sophistication with a culture that translates into an exceptional employee and patient experience. Most recently we found that combination with both Pristine Senior Living in Ohio and Trillium Healthcare in Iowa.

Pristine took over operations for our Liberty acquisition at the start of Q4 2015. They've invested in people and processes and in a very short time exceeded our expectation.

For example, anecdotally, Pristine reports that their Medicare census is up almost 60% since the takeover. Their first several Department of Health Surveys have been superior to the state averages as well, and they still have a lot of room to grow overall census and skilled mix. We could not be happier with how this partnership is taking off and are presently pursuing additional acquisitions to further strengthen Pristine's Master Lease with us.

On February 1 we expanded our existing Trillium Healthcare Master Lease by purchasing nine skilled nursing facilities in Iowa from a longtime operator who is retiring from the business and installing Trillium as the new operator. This $32.7 million investment provides Trillium with additional scale and a healthy cash flow to continue to fuel their growth plan.

The deal was priced with a strong 143 times lease coverage and a 9.76% going-in cash yield. And, like Pristine, we continue to look at additional opportunities to grow with Trillium.

We continue to carefully vet and then stay close to our tenants, especially on the skilled nursing side. Making sure they are sophisticated, engaged, and staying abreast of the changes in reimbursement and other market dynamics is critical to their long-term health and the long-term well-being of our portfolio.

Both we and our operators are well attuned to the evolutionary changes occurring even now. Accountable care organizations, Medicare Advantage, and other value-based payment systems such as the current bundled payment cost initiative or BPCI pilot and the accompanying Comprehensive Care for Joint Replacement pilot, also known as CJR, are all having predictable impacts, particularly on operators that may not be well equipped to timely just to the changing landscape.

Long anticipating the impact of these changes, we have been carefully partnering only with the operators who are nimble, decentralized, and looking to gain advantage from such changes. So far this is paying off, as our quality skilled nursing tenants appear to be quite healthy and are scaling smartly against the headwinds that appear to be rocking some of other boats.

Mark will now give some color on our pipeline.

Thanks, Dave, and hello, everyone. As Greg mentioned, we have solid acquisition targets in the pipeline. While we are always looking at dozens of opportunities, at present we are in serious negotiations for approximately $100 million of quality assets.

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. We are excited to not only tack on some of these deals to our existing tenant base and strengthen our in-place Master Leases; we are equally excited to commence new relationships with great operators who understand what it takes to succeed in today's ever-changing healthcare environment.

Earlier, Dave touched on CJR and BPCI for SNFs. We are cognizant of these issues, as well as continued oversupply concerns in the senior housing space. So in addition to partnering with sophisticated, nimble operators who embrace the dynamic reimbursement environment, since December we have adjusted our underwriting to reflect what we believe are the right risk-adjusted rent yields and the necessary lease coverages to address rising cost of capital and allow our tenants some additional runway.

For valuing skilled nursing assets, our hurdle rates for going-in lease yields are now generally pegged in the high 9% to low 10% range, and coverage is in the 1.35 to 1.45 range. All are asset specific.

On the senior housing side we continue to look for assets with quality physical plants that target a midmarket consumer in secondary and tertiary markets that are somewhat insulated from the uptick in development that is primarily taking place in major metro markets. For these, we have increased our required going-in yields to a high 8% and low 9% range, with minimal lease coverage of 1.2 times.

Our investment philosophy focuses on stabilized assets rather than pure turnarounds, so prohibits overpaying for assets that have nowhere to go but down. We'd much rather invest in a stabilized asset that's got wholesome remaining upside and some margins for operating error, and then put adequate lease coverage on that to protect our rent stream long-term. That, coupled with quality tenant selection, is what has driven the growth in lease coverage on virtually all of our assets to date, even though about a third of our run-rate revenues come from assets that have been in the portfolio for less than 15 months.

Three quick items to close. First, let me mention that our preferred equity investment in our Denver area assisted living and memory care campus is on track to come online in Q2, and first deposits are coming in now as construction is wrapping up.

Second, as Dave discussed, we've seen great progress at Pristine since the Liberty acquisition in October. We are happy to report that they and all of our tenants have exceeded our underwriting expectations and are in great shape from a lease coverage perspective. We are staying close to all of them to be sure that they are managing the evolutionary changes on the horizon and that they are ready to take advantage of the opportunities they will present.

Finally, for the record, as we speak to you today CareTrust has 132 properties in 15 states, and we are actively working with a variety of brokers, sellers, and operators to source additional opportunities for growth. With that, I'll hand it to Bill.

Thanks, Mark, and good morning to everyone. For the quarter, we are pleased to report that normalized FFO grew by 94% over the prior-year quarter to $12 million. Normalized FAD grew by 88% to $13 million.

Just a little further color on Q4-over-Q4 earnings. As you'll recall, in December of last year we paid our purging distribution, which consisted of approximately $33 million in cash and 9 million in shares. Unlike the spin shares, which were retroactively applied to prior periods, the purging distribution shares were not, but they were going to have to be paid regardless.

So, viewing the quarters as if those shares had been outstanding for all of Q4 last year, FFO per share would have been $0.19 in Q4 last year, compared to $0.25 in Q4 this year, an increase of 36%. FAD per share would have been $0.21 in Q4 last year, compared to $0.27 in Q4 this year, an increase of 32%.

Now on to our 2016 guidance. In our press release schedules we have supplied guidance on a net income-to-FFO and -FAD reconciliation on a per diluted share basis. We are projecting normalized FFO per share for 2016 to be between $1.05 and $1.07, and FAD per share to be between $1.15 and $1.17.

Included in this guidance are the following assumptions. There are no new investments included beyond those made to date, nor is any new debt or stock issuance contemplated beyond the new debt we have already disclosed. There are no CPI bumps factored in any of our leases.

A couple of our leases have just celebrated their first anniversary and the increases were immaterial, to say the least; and we are not sure this dynamic will change through the coming year. So, the Ensign rents are included in our guidance at $56 million; Pristine is at $17 million; and total rental revenues for the year are projected at approximately $84 million, which includes the two most recently announced. Unless some modest inflation starts to come back soon, scheduled CPI rent increases for our tenants this year could be flat to minimal.

Our three independent living facilities are projected to do roughly the same as last year, or about $200,000 in NOI. Interest income is expected to be approximately $400,000, down from $900,000 in 2015 because the accounting rules limit the amount that we can recognize on our preferred equity investment, and this caps out in 2016.

We stop accruing interest income around midyear, but the contract interest will continue to run and we expect to recover it all when the asset is stabilized and sold. As a reminder, we have the option to buy this asset with an outstanding tenant in place on a fixed-price formula stabilization at a discount to market.

Interest expense is expected to be approximately $24.3 million and includes a $330,000 writeoff of deferred financing fees associated with the recent payoff of the GE debt. In our calculations we have assumed a LIBOR base rate of 1%. That, plus the LIBOR margin rate of 185 bps on the revolver and 205 bps on the new seven-year term loan, make up the floating rates on our revolver and term loan. Interest expense also includes roughly $2.3 million of amortization of deferred financing fees.

G&A is projected to be between $9 million and $10 million, which equates to just under 10% to just over 10% of total revenues. G&A also includes roughly $2.6 million of amortization of stock comp.

G&A should vary some in 2016, if we are required to comply with Section 404 of the Sarbanes-Oxley Act and to the extent we grow and add a couple of FTEs. Otherwise, the spikes that we saw in late 2014 and the back half of 2015 should begin to flatten.

As for our credit stats in relation to the numbers just discussed, our debt-to-EBITDA is approximately 5.7 times today; leverage is about 48% of enterprise value; and our fixed charge coverage ratio is approximately 3.6 times. We also have about $18 million cash on hand.

Lastly, our tenant concentration with Ensign is now down to 64% of revenues, although I must always remind you that we are very bullish on them as an operator and a tenant, and we continue to love their 2.0-times-plus lease coverage.

Each of these credit metrics continues to exceed the -- what could change our rating up hurdles in the credit opinion we received from Moody's in 2014. With the newly amended credit facility we have even more runway to fund our growth in 2016.

And with that I'll turn it back to Greg.

Thanks, Bill. Well, to wrap up, we're excited about the trajectory we're on. We have a solid and growing rent stream, an enviable portfolio, with a true best-in-class tenant -- several best-in-class tenants, and abundant opportunities to grow.

We hope this discussion has been helpful. We're obviously excited about both our near-term and long-term prospects, and we're grateful for your continued interest and support. And with that, we'll be happy to answer questions.

(Operator Instructions) Paul Morgan, Canaccord.

Hi, good morning. You mentioned your shift in underwriting in terms of cap rates and EBITDAR coverage. I'm just wondering; as you're out in the market looking at transactions, are you finding it tougher to nail down deals if it's something that would be a 10% handle on a skilled asset with 1.4 coverage? Is that going to make it a little bit more difficult? Or how is the market versus where you are right now?

No, I think the skilled nursing market still in particular pockets is pretty hot. So we continue to look for the onesies, twosies.

The transaction we closed in Iowa was a piece of a portfolio, and that specifically was a scenario where we weren't the highest bid but we were the certainty of close, if you will. The seller knew that we were going to be able to perform; they knew that our tenant was real. So they took certainty and they took less proceeds.

So I think certain markets throughout the country, they are still fairly hot on the SNF side. But as we look for onesies, twosies with a good solid Medicaid base, we're particular in terms of looking for those types of assets that our tenants can grow their coverage up.

So we're seeing opportunities, but for the most part we're pretty particular about finding those types of assets. So we're looking at a lot. I mean, they're out there; you just have to dig and continue to have conversations with the brokerage community as well as other operators -- because even our operators are bringing the deals to us.

How are you thinking about your appetite from a volume perspective, as you think about it in context of where you want to see your leverage metrics go throughout the year, and the balance of equity and debt?

Paul, it's Greg. We've been real clear with the markets that we want to bring our leverage down over time, but we expect to ratchet that down. In other words, it's going to go down and then it's going to go up a less; and then it'll go down some more and go up less.

We're in a phase now where we just had an offering a few months ago that raised quite a bit of equity, and we are in that ratchet-up mode. But we don't want to ratchet it up too far as we continue to pull this down.

In terms of our appetite, we're still looking a lot of, lot of deals, as Mark says. But we're just being more selective about them. I think between the new credit facility and our hopes for the equity markets coming back a little bit, we feel like we should still be building and keeping, maintaining a pretty robust pipeline.

I think you mentioned that you're looking at new deals with Pristine as well. Is there any more color?

Is that stuff that could come to fruition, say, in the first half of the year? Would it be material in size, or is it kind of one and two add-on type deals?

Yes and no. We are looking at stuff for them. They just got into 1,200 beds. We're going to give them time to absorb that. But we don't mind; we think they are doing super well.

We're watching it pretty closely, and certainly they can handle one or two more tack-on opportunities. So we're working on some of those; and yes, we could close something in the first half of the year for them.

We really want to support our existing tenants, above all. If they're ready to grow, we want to be there for them; and Pristine is ready to grow some.

Great. Just lastly, there's been, obviously, a lot of commentary in the marketplace about some of the bigger national players and struggles with, in particular, the managed-care mix and declining length of stay. How does that go into your underwriting as you look at deals?

Obviously, Ensign has had a different experience, I think, in terms of managing that transition. But do you look at where things are now versus where they might be going, whether length of stay could fall for assets that you have, or your underwriting on the skilled side? Is that a meaningful part of your consideration?

Look, sure. It always has been. It goes back to our core investment criteria, which is: Who is the operator?

Frankly, I think I agreed with what Ensign said yesterday on their call. They called that commentary a bit misguided and -- because there are really a lot of operators out there who are not experiencing the same kind of headwinds that some of the big boys are apparently having right now, as these smaller, better, more local, more nimble operators are watching this coming.

And there are no surprises here. This stuff has been coming for a long time.

And any organization, any operator who has been actively working with their hospitals, with the managed-care organizations, with the physician groups in their markets, with others is not going to be blindsided by some cuts through Medicare Advantage or the entry of BPCI or CJR into the markets where the operated.

In fact, you look at Ensign and they are the bellwether for this. They are actually looking to gain market share even at the same time they are actively cutting length of stay to respond to the needs of their conveners and episode initiators and their other partners in the healthcare continuum.

So this is not a revolutionary change that the skilled nursing industry is undergoing. It's an evolutionary change.

It is not a big surprise. It has been coming, and those who've been willing to look have seen it coming from far off and have made adjustments and are ready for it.

Those are the tenants that we look for. Those are the operators that we work with. Those are the ones that we can vet out and tell you, because of our operating backgrounds, that we think that they're going to do fine -- and not only do fine but maybe even do better in this new environment, which is a good environment.

I mean, you're talking about actual, genuine fixes to some of the problems that afflict the healthcare industry and have for a long time as they try and be more efficient and get costs under control. This is a good thing.

Great, thanks.

John Kim, BMO Capital Markets.

Thanks; good morning. I realize Ensign is a great operator, and your coverage with them is very strong at over 2 times. But can you comment on their decision to close one of its facilities last week, and if that's normal practice for them to do?

Sure. It's a good question and thank you. It's not normal practice for anybody to do.

But they came to us a couple of weeks ago and basically just said: Look, for a variety of reasons, we decided that we would like to discontinue operations at this facility. And then worked with us, and we worked cooperatively with them, to figure out a win-win for everybody.

We think that they are -- this facility had been a significant distraction for them. I don't want to put words in their mouth or say too much about it, but what they said is that it was a very significant distraction, and that from their perspective closing down one of their 180-plus facilities seemed like the right thing to do, so that they could focus on everything else that was going on.

For our part, we looked at it and said: Look, we're happy to let you do that. Obviously, it can't hurt us. They did not have any plans or intent to do anything to hurt us.

We continue to get all of our rent under that Master Lease. And in addition we have the opportunity to take that asset out of the Master Lease if, as, and when we want to and monetize it. So for us it's kind of free money that we can deploy into other high-yielding investments if -- when the time comes; and we think that time will come, hopefully, relatively soon.

But, no, you should not expect to see them running around closing down facilities on a regular basis. In fact, this is the first time they've ever done it in their entire history. And while I can't predict the future, I'd be surprised if it didn't turn out to be the last.

Okay. Then what do you plan to do with the asset? Is it just going to be sold to another operator? Or is there an alternative use?

Well, yes, the asset will be decertified. So it won't be resold as a skilled nursing facility, or I don't think it will be resold as a skilled nursing facility.

We still have -- it's actually two assets in Texas, because you have the hard asset, the real estate and improvements; plus you have an intangible, which is these Medicaid bed rights, which are very valuable and for which there is a fairly brisk market in Texas, particularly in large metro areas. And this one happens to be in Harris County, which is the Houston Metro area, so those bed rights are going to be very valuable to us.

We will have an opportunity to probably sell that real estate to an alternate user. We are actually talking to a couple of alternate users who like to buy that kind of an asset and repurpose those assets right now.

Then with respect to the bed rights, we've already been contacted by more than one builder down there who would really like to have them, to go build other facilities, We may redeploy them ourselves -- hang on to them and just redeploy them into other facilities ourselves.

So we have a whole range of options. We haven't really had a lot of time to think about it. But I guess my point is that there is a ton of value there, and we'll look to be extracting that value over the long-term from those assets.

Is the most likely alternative use residential, or retail, or another kind of asset type?

Well, I mean there is -- we know some guys who convert former skilled nursing facilities. And this is a fairly nice facility; it's not terribly well located, but it is in the county. It could be repurposed for assisted living; it could be repurposed for a children's home; it can be repurposed for a couple of other things. So we'll just see what the market brings us.

Okay. A follow-up to Paul's question, with the concerns on skilled nursing operators, you do have a very strong partner in Ensign and they are publicly traded, so we know how the operations are going. How do we get comfortable on Pristine and some of your other partners, where we don't have up-to-date information?

Well, Pristine's financials will be included in ours starting -- when is that, Bill?

We'll file their most recent annual statements -- so basically 2015 -- next month in an amended 10-K that we will file. To the extent that they continue to stay material, we will continue to file their annual financial statement with our 10-K.

If they drop below a certain percentage, then we are no longer required to file their financial statement. But I would expect us, as these leases continue to, call it, age, we'll put out more disclosure on coverages and things like that.

Okay, thank you.

Chad Vanacore, Stifel.

Hi, good morning. I'm going to apologize because I missed the prepared commentary; just hopped on late. But where are you seeing better opportunities in your pipeline right now? Is it senior housing, or skilled nursing, or what mix of those?

Well, we continue to see -- it hasn't changed significantly from -- this is Dave, by the way; hi, Chad. It hasn't changed significantly from last year. It's always dynamic in what portion is senior housing versus skilled nursing.

I would say right now we're seeing a little bit more in the seniors housing side. But the pipeline as a whole remains fairly consistent with what it's been since 2015.

All right.

With the cost of capital increasing and our experience with skilled nursing operators, we continue to be very bullish on the skilled nursing assets and the risk-adjusted returns that we can get there.

One of the things that you missed in Mark's comments is our philosophy of not wanting to pay top dollar for A+ top-performing assets that have no place to go but down. Our sweet spot is to find stabilized assets that still have a little bit of room to grow that coverage, either Medicaid shops that have the ability to grow their skilled mix, something like that. So we continue to look for those and do those deals.

But, Dave, when you look for the upside of those facilities, what kind of occupancy range are we talking about, where it's stabilized but there's still some more upside for you?

One example I think to point to would be the Liberty transaction that we did. That was -- we considered that a great fit with our background and the philosophy that I was just talking about. I think the occupancy when we took over the Liberty deal was --

82%.

It was in low 80%s, 82%, but the cash flow was very strong. And it's been really incredibly fun to see what Pristine has done there in a very short amount of time and increasing that Medicare mix, Medicare census by almost 60% as we stand today, as they report to us.

So that's a perfect example of heavy Medicaid shop, room to grow both total census but also skilled mix. And the other beauty of that is that those assets are less susceptible to any impact by the CJR because they are highly long-term care beds, and they're really just going to be growing that lease coverage for years to come.

Chad, let me just add to that a quick comment about -- you asked about census. High 70%s low 80%s seems to be a sweet spot for us, assuming the facilities are running at stabilized cash flows. But the interesting thing is that they -- you can have a stabilized facility at 50%; it just depends on how good the operator is.

If you have a 100-bed facility, but there's only 50 patients, you can still run it like a 50-bed facility and make plenty of money. We've seen that happen over and over. It's one of the key indicators that we look for when we're vetting operators, is to see how well they deal with fluctuation in their census.

The other thing to just remember is what Dave just said about the fact that we're buying facilities that do have some organic upside in them, as a rule. We're not buying turnarounds, but they do have some organic upside in them.

And we think that's a much smarter investment approach than going out and buying some facility that's already 95%, 100% occupied, and running 70% Medicare mix, and really has no place to go but down. We like facilities that have some margin for error; we like facilities that we can get at a fair price with some upside.

And as you see us investing that way, we're still waiting for some actual data to come in, but anecdotally, just talking to our operators, it appears that our lease coverages are growing across the board.

All right, thanks. Then just thinking about the overall market, given the volatility in skilled nursing and then the slower acquisition pace in senior housing, have you actually seen any changes in cap rates on the businesses that you're looking at?

That's pretty fluid right now, but I think we are. Remember, from the spinoff we have always been ahead of the curve on cap rates, because we did have a higher cost of capital than our peers, and so we just had to stay up there.

The question was asked earlier of Mark about: Can you really get these higher going-in lease yields? The answer is yes; we've been getting them, and we'll continue to stay above the peer group and just look for those hidden gems.

We think right now, as I mentioned in my prepared remarks -- because I know you didn't hear it -- that we think we're moving into a buyer's market, at least all the indicators appear to be there. So, yes, we're going to be able to make deals this year.

All right, that's great. Thanks.

Jonathan Hughes, Raymond James.

Hey, good morning, guys. Thanks for taking my questions. I just had a few follow-ups. You mentioned tenant coverage solid and growing; I know Ensign's over 2 times.

But I don't think I heard an overall portfolio coverage number. If you could give us that, that would be helpful.

What's the overall portfolio?

This is Mark. I would say it's about 1.82, I think is the last time we calc-ed it. Since so many of the assets came in over the last, call it, 15 months, we don't have a full trailing 12. So as we get into, call it, the second quarter, third quarter we'll have a full trailing 12.

But if we used, call it, the end of year, the last of -- certainly taking Ensign's trailing 12 into account and then the acquisitions into account and the year-to-date financials that we have for them, it was 1.82 times.

Yes, all those more recently acquired facilities have come in pretty much in the 1.30 to 1.45 range on the SNFs, and in the 1.20 to 1.30 range on the ILFs. We just don't have any data to tell you actually what the actual number is, just anecdotal reports from the operators, who report to us on a two-quarter lag. We just know that they are doing better.

Okay; fair enough. On the $100 million you mentioned in the acquisition pipeline, what percentage of those deals are from relationships versus new operators, new relationships?

Let us eyeball that. Hang on one second. It's about 50-50 on new tenants as well as our existing tenant base.

I'll tell you that of the new tenant relationships, these are folks that we've call it, courted for many months. We know them intimately, and we've been out -- we've seen their existing operations, and that's obviously part of our vetting process.

But like we said in the prepared remarks, there's going to be some tack-ons and then new relationships to begin with the regional operators.

Okay. Then a last one, to touch on Paul's earlier question. Obviously at this point where the stock is trading, you said you won't issue equity at these levels.

What's the top end of that leverage ratio that you feel comfortable with? And are you concerned that levering up with acquisitions on the line may put you into a share-price overhang as the market anticipates a future equity raise?

Well, to answer the latter part of your question first: Of course. We certainly don't want to get into a spot where we have our backs to any walls.

So if push comes to shove and the markets just stay tight, we have no problem heading for the sidelines and just waiting this thing out. We're not going to back ourselves up that way.

But we did just redo our credit line and upsized it. We did just redo the term loan, and the banks were very supportive. We do have ample access to -- we have ample liquidity to do what we want for the near term.

And we're comfortable. We came out at 7 times 20 months ago, and we said we were going to ratchet that back down and up, and down and up over time. So if we bumped our net debt-to-EBITDA up into the low 6s, we would still be very, very comfortable.

But I would tell you that if we're going to go that high we're going to only do it for deals that are super compelling and that are going to add a lot of value long term. I just would remind you where we came from. We came from Ensign, where we were always contrarian investors and we made a ton of money by having some dry powder and being out in the marketplace buying when everybody else was sitting on their hands.

So we'll be careful, but we smell opportunity. And without backing ourselves up against the wall, we will go out and take advantage of that.

All right. Very, very helpful. Thanks for the color, guys.

George Clark, RBC.

Hey, guys. For your recent acquisitions, did you replace the operator, or was that operator already at the asset?

Yes, we replaced the operator there with our new operators.

Then for the investment market, are you guys seeing higher-quality assets enter your price range?

On the seniors housing side, I would say that we have not yet seen the real high-end Class A in Class A market private-pay-only assets enter our price range yet. But that's not what we've been tracking anyway.

The concern with oversupply, we find less concerning when you look at the more affordable senior housing space in the secondary markets area. There is a lot less new supply coming on there, and we get the better returns there as well.

So yes, we don't see that top-end senior housing stuff enter that high 8%s, low 9%s going-in cash yields that we've been enjoying on the more affordable space.

Right; and then what about on the SNF side?

Yes, the SNF stuff, we've -- harder to say. I don't think we would say that the assets that we've been purchasing are lower quality or more affordable type stuff. It's asset by asset, and we see a range of assets in the skilled nursing space in our pricing.

It's more based on the market. So I guess I would say I don't see as much of a variance in the quality of the skilled nursing assets as it relates to cap rates, as we do on the seniors housing side.

All right. Thanks, guys.

Duncan Brown, Wells Fargo.

Hey, guys; good morning. Most of my questions have been answered, but just a few. Bill, I think in the press release, $85 million of the revolver is outstanding. Do you have full access to the remainder, or does anything else need to be triggered to pull down on that?

No, we need to acquire more properties to pull down more on that. But if you run the iteration out, we get 60% of any purchase price on an asset going in. We have -- we can go up to $400 million.

Got you. So in a real-world scenario, so long as you're using the revolver to buy assets, which of course you would, you'd be able to have full access to the $400 million?

That's correct.

Got you. Then did I hear you on your guidance that you're assuming a LIBOR of 1%?

That's correct.

But that's not a LIBOR floor? It's just that's where you've pegged it? Or is there a LIBOR floor?

There is no LIBOR floor. That's just where we pegged it.

We have four choices to choose from on a LIBOR contract: a one-month, a two-, a three-, and a six-month. And we just use 1% to be conservative.

Understood; that's helpful. Then last one for me. Greg, I wondered, high level -- there's been a lot of high-level questions. And you've made some comments about if you've been at a smart SNF and paying attention to bundled payments, talking with the hospitals and managed care, etc., you wouldn't be caught off guard by these things that some of the big guys seem to have.

I guess I'm curious on your thoughts of what's the next iteration here. What are you guys thinking about when you're purchasing assets that -- what are the other things that people should be paying attention to in this world?

I think it's really critical that you look -- you watch Star Ratings. When Star Ratings first came out everybody -- the operators really hated them; and they still probably do, because the system's rather imperfect. But it's a reality of life, and I think people have accepted the fact that they've got to get their Star Ratings up.

Come 2017 there are going to be some structural changes in the way discharges come out of hospitals. And if you don't have at least a three-star rating on your skilled nursing facility, you're not going to be able to take a lot of the discharges that are coming out.

So it's critical that operators -- and it takes a long time to move a Star Rating. If you have a one-star rating, because it's based on your operating performance three years back, even if you buy a facility and step into it as a new operator and make 1,000 changes to fix it and make it better, you're still dragging that operating history, that survey regulatory history behind you for a couple of three years until you can get that Star Rating up.

So we're going to be watching that. I think what you're going to see is, when it comes to pricing on skilled nursing facilities, Star Rating is going to start to be a very significant factor because of that: because it's going to dampen revenues for folks whose Star Ratings are too low and perhaps truly stay too low. So that's just one thing that we see on the horizon.

The other thing I think that you would -- we watch very carefully is compliance. What kind of compliance program does the operator have? How well attuned are they to the needs to maintain their medical records correctly, to bill correctly, to run their facilities correctly, to evaluate their patients correctly?

Do they have a good, solid compliance and auditing program to make sure that they not only generate the revenues but that they long-term get to keep those revenues? Because the government can come and take them back if you are not crossing (technical difficulty) and dotting your i's.

So you see some of the larger operators out there who are under investigation or who are operating with the big ax hanging over their heads because -- and everybody, in their defense, I would tell you the fact that they've got those investigations is not necessarily an indicator that they've done anything wrong at all. It's just part of the realities of working in this industry.

So again a good, solid compliance program and you can demonstrate to government regulators that you are minding the store, you're less likely to have those kind of problems. So we watch for that.

That's helpful. I'm sorry, maybe just one follow-on. Anything you can say about your portfolio and associated Star Ratings currently?

Star Ratings on our portfolio? Do we know what the Star Ratings are? I know --

When we initially acquired Pristine, Pristine had a couple -- let's see, I want to say they had three to five facilities in the four- and five-star range. The bulk of the facilities were in the two- to three-star range, and a few were in the one-star range.

The balance of the other acquisitions in 2015 were probably average three-star, if I remember correctly. So they're all in pretty good shape from that perspective.

I mean the great thing about -- as you take higher-acuity patients and shift from being, call it, a Medicaid shop to a more transitional care, the increased staffing is going to help on starting to change the Star Rating. As they get in there and start to work on the quality measures, and start to provide better care, and really are focused on the specific MDSs at each of the facility, they are able to change the quality measure piece.

Then the last piece of the Star Rating is the survey process. Oftentimes when you get a Medicaid shop, typically the Department of Health loves to see new operators that come in, that are focused on providing care. And you have companies that are focused on taking care of staff, taking care of patients; and so sometimes you can get the benefit of the doubt on the annual survey inspections, when the Department of Health knows that you're taking the building in the right direction.

From Pristine's perspective we don't have the exact count, but that's something that we'll take a look at probably in the next quarter or two as we look to communicate their progress.

Great. That's hopeful. Thank you.

I'm not showing any further questions at this time. I'd like to turn the call back over to our host.

Well, once again, thanks, everybody. We appreciate your interest and your time. We're happy to answer any further questions you have at any time. Take care.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.