CareTrust REIT Inc (CTRE) 2016 Q1 法說會逐字稿

Welcome to CareTrust REIT's first-quarter 2016 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, 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 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 to 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 or changes arise as a result of new information, future events, changing circumstances, or for any other reason. Listeners are also advised that the Company filed its 10-Q and 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'd like to turn the call over to Mr. Greg Stapley, CareTrust's Chairman and CEO. You may begin.

Thank you, Sabrina. Good morning, everyone. Thank you for joining us today. With me are Bill Wagner, our Chief Financial Officer; Dave Sedgwick, our Vice President of Operations, who is joining us by phone from our East Coast office; and Mark Lamb, our Director of Investments. Our objective today is to briefly give you some color on the quarter and what we see on the horizon. For the numbers and other details, we, of course encourage you to look at our Q and the press release we filed yesterday.

Q1 saw us achieving some significant milestones in our ongoing growth and development. We refinanced the last of our legacy Ensign debt, achieving an immediate seven-figure annual interest savings. We up-sized our unsecured revolver to $400 million, giving us more dry powder than ever to pursue external growth; and we executed our first overnight, a $111 million equity raise that was more than two times oversubscribed within a couple hours, which closed on a 3.7% file to offer discount, which was a vast improvement over our first follow-on last August.

In addition, we grew the portfolio with over $116 million worth of new investments in the quarter and since, adding several new assets, markets and outstanding operators. The average [gleaning] cash yield on these investments was 9.1%. This growth, along with all the other deals under contract that we announced in conjunction with our March follow-on, will reduce the tenant concentration of Ensign, our former partners in blue-chip principal tenants, from virtually 100% less than two years ago, to less than 57% of revenues on a run-rate basis.

By the way, speaking of Ensign, they are not surprisingly doing extraordinarily well in the evolving skilled nursing environment, and we congratulate them on the way they are adapting and apparently capturing market share in many of the markets where they do business. They are again raising the bar and they remain the standard against which we evaluate all other operators who are candidates for inclusion in our portfolio as part of our operator-first business model.

Perhaps most importantly for us this quarter, through a combination of retaining earnings, making highly accretive investments, and raising equity at fair prices, pro forma for both closed and announced deals we have a reduced leverage to less than five times net debt to EBITDA, and less than 36% of total enterprise value, both of which are right in the middle of our target ranges for those key metrics. And we've done this while raising our well-protected quarterly dividend by over 6% to $0.17 a share. This pay-out still leaves us around $24 million to $26 million a year in annual free cash flow for redeployment to further strength in our balance sheet. These accomplishments and others, supported by consistent execution by both our tenants and everyone on our team, have allowed Standard & Poor's to recently upgrade our corporate credit rating from B to B-plus, and our bond rating from B-plus to BB minus.

On the acquisition front, our pipeline is as robust as ever. We expect that it will continue to grow as we continue to execute solid deals and distinguish ourselves as a reliable and welcome counterparty among the industry's M&A community. And as I noted above, the capital markets appear to be very receptive to our strategy and story as well. Even with our growth, we remain small enough and nimble enough to do deals that much larger REITs won't usually bother with. These smaller deals not only move the needle for us, they also allow us to capture the outsized lease yields that you were seeing with solid lease coverages to back them. And while we are not specifically targeting any particular asset mix, we remain quite comfortable in the very familiar skilled nursing space, which typically yields the best spreads over our improving cost of capital. These SNF investments offer a very secure income stream when we have the right operator shepherding our assets, which of course, is our first and most important priority.

So as we continue to execute on our unique business plan in a disciplined fashion, we are more optimistic than ever about CareTrust's future. With that, I'll turn it over to Dave to briefly talk about our recent deals, and then to Mark to discuss the pipeline, and finally, to Bill to discuss the financials. Dave?

Thanks, Greg.

So we've had a solid start to the year as we've added new operators, properties, and states to the portfolio. We congratulate our terrific operators -- New Haven, Trillium, Priority Life, Better Senior Living, Premier, Cascadia, and 20/20 -- all of whom have stepped into new acquisitions with us this year, on their smooth transitions of our recently acquired properties in Texas, Iowa, Maryland, Indiana, Wisconsin, North Carolina, Idaho, and Florida. As long time operators ourselves, we know what it takes to thrive in the dynamic skilled nursing and the competitive seniors housing spaces. These new operators we've brought into the portfolio have that requisite sophistication, talent, vision, and culture to succeed for years to come. We're actively working to further grow each of their individual portfolios with us this year. On our last call, I talked about our recent larger deals in Ohio and Iowa with Pristine and Trillium. While it's still very early in their transitions, suffice it to say they are both performing very well, as expected.

Now, a brief word on the evolving skilled nursing environment. Although we aren't exclusively pursuing skilled nursing, as you can tell from our recent acquisitions, we remain as bullish as ever on the skilled nursing space. As has been the case for the last 15 years, the skilled operators who are nimble, talented, sophisticated, and committed to quality care, will be able to capitalize on the increasing demands for transparency, quality, data, and collaboration with the acute hospitals, managed care organizations, home health providers, and other stakeholders in their local markets. So we view the recent headlines as a variation on a 15-year theme of providers needing to deliver care better, faster, and more efficiently. And we note for the record, that Medicare and Medicaid reimbursement rates have actually trended positively over that time.

On the seniors housing front, our approach has been to focus on the B2B-plus quality assets and secondary markets, thereby avoiding the oversupply concerns felt by some of the A-plus assets and the primary MSAs. Anecdotal reports indicate that occupancy across our seniors housing assets remains strong. We're at a point now where we can start to consistently collect that data and plan to start supplementing our standard disclosures with other relevant information starting next quarter.

So to conclude, as you saw in Q1, we continue to focus on execution -- execution at the transactional level by our team, and execution at the operational level by our tenants. Our plan is to continue taking advantage of our size by mostly doing smaller dollar deals with quality growing operators, which offer stronger yields and that cover well. That's what we did in Q1, and thus far, Q2 appears to be following that same pattern.

Mark will now give you some color on our pipeline.

Thanks, Dave, and hello, everyone.

As most of you know, the senior housing side of the healthcare real estate market has been experiencing some long-overdue price dislocation of late, which is good for us as a buyer. NIC MAP recently reported that senior housing deal volume for Q1 was anemic, declining by around 30% quarter over quarter, both in dollar volume and deal volume. This is due, at least in part, to a reported 80% drop in public REIT purchases of senior housing assets over the same quarter last year. By contrast, sales of skilled nursing assets hit their highest levels since early 2012, trading nearly three times the dollar volume of senior housing assets in Q1. This is what some might refer to as an inverted market, but we aren't surprised.

We do suspect the deal flow on the senior housing side will pick back up with other healthcare REITs' cost of equity returning to more normal levels, but we view this recent trend as a validation of our favorable view of skilled nursing assets. While they may carry a little more regulatory litigation and headline risk, they not only pay us a nice premium for those risks -- which, by the way, are mostly more controllable than most people realize -- but their valuations are also much more stable and predictable over time than A-quality senior housing. That's one reason why, although we continue to seek and close on well-positioned and well-priced senior housing assets, we are not unhappy to be overweight in SNFs.

As we sit here today, the pipeline is strong, with new deals crossing our desks almost every day. And as you know, we've been very busy lately closing the $97 million in deals under contract that we pre-announced right at the end of last quarter in connection with our follow-on equity offering. Of that amount, more than half, or approximately $51 million, has closed already. Now, in addition to the remaining $46 million we have under contract to close in the next couple months, the pipeline is rebuilding nicely and is well on its way back toward the roughly $100 million level that's normal for us. Remember, when we quote our pipe, we only quote deals that we are actively pursuing, which meet the superior yield and coverage underwriting standards that you are accustomed to seeing from us; and then only if we have a reasonable level of confidence that we can lock them up and close them.

Finally, for the record, as we speak to you today, CareTrust has 143 properties in 19 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.

For the quarter, we are pleased to report that normalized FFO grew by 72% over the prior-year quarter to $13.1 million, and normalized FAD grew by 65% to $14.1 million. Normalized FFO per share grew by 13% over the prior-year quarter to $0.27, and normalized FAD per share grew by 7% to $0.29. Given our most recent quarterly dividend as $0.17 per share, which we just increased by a penny, or 6.3%, this equates to a pay-out ratio of 63% on FFO and 59% on FAD, which represents one of the safest and best-covered dividends in the healthcare sector.

With this performance, we are increasing FFO guidance for the year. Details are in the schedules to yesterday's press release, but briefly, we are now projecting normalized FFO per share for 2016 of $1.06 to $1.08, and normalized FAD per share of $1.14 to $1.16. Included in this guidance are the following assumptions: no new investments are included in the numbers except for those we pre-announced at our recent equity offering. Of the $97 million we announced in late March, approximately $46 million, at a blended yield of 9.2%, is left to close. We will use our $400 million revolving credit line to fund these investments, which would bring the outstanding balance on the line to about $81 million. No new debt or stock issuances are contemplated.

With inflation running nearly flat, there are no CPI bumps factored in for any of the leases, which means Ensign is included in our guidance at $56 million, and total rental revenues for the year are projected at approximately $91.2 million based on closed and announced deals. We actually do anticipate a small bump in our Ensign rent on June 1 and in our other leases throughout the year, with an emphasis on small.

Our three operated independent living facilities are projected to do roughly the same as last year, or about $200,000 in NOI. As I discussed last quarter, 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 will cap out in Q2 of 2016. While we will stop accruing this income, the contract interest will continue to run and we expect to recover it all when the asset is stabilized and sold. We also have the option to buy this new asset with an outstanding tenant in place on a fixed-price formula at stabilization. By the way, that asset has essentially completed construction and is starting its lease-up now, so we should have more visibility into the timing of the exercise and repayment of the pref over the next couple of quarters.

Interest expense is expected to be approximately $23.6 million and includes the $326,000 write-off of deferred financing fees associated with the pay-off of the GE debt. In our calculations, we have assumed a LIBOR base rate of 1%. That, plus the LIBOR margin of 185 bps on the revolver and 205 bps on the 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 now equates to just under 10% of total revenues. G&A also includes roughly $2.4 million of amortization of stock comp. With our recent offering and given our current stock price, it looks as though we will have to comply with 404 this year. I've included some estimated costs in our G&A number for compliance, but we are still working through it and should know more next quarter.

As for our credit stats, in relation to the numbers just discussed, on a run rate basis our debt to EBITDA is approximately 4.9 times today, leverages about 36% of enterprise value, and our fixed charge coverage ratio is about 4.2 times. We also have $8 million of cash on hand.

Lastly, pro forma foreclosed and announced deals: our tenant concentration with Ensign is now down to 57% of run rate 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 two times-plus loose coverage.

As Greg mentioned earlier, Standard & Poor's upgraded both our credit rating and our bond rating this week. We also met with Moody's recently and we are optimistic that we could receive an upgrade in our credit ratings with them this year as well. Having said that, let me just clarify what our current goals and strategy are with respect to further improving these ratings generally, and to reaching investment grade ratings specifically. Simply put, we believe we will get there in time as we continue to make solid accretive investments, intelligently optimize our balance sheet, lower our weighted average cost to capital, and build a fundamentally solid Company from top to bottom. We view investment grade as a happy by-product of these sound business practices, not as an over-arching goal to be achieved at the expense of all others.

In other words, we don't intend to sacrifice the denominator for size, or to grow simply for growth's sake. We see growth only to drive total shareholder return. Investments and corresponding capital activities that meet these critical thresholds are the only ones that truly make sense to us, and we believe that they will make eminent sense to our investors now and to the rating agencies as we continue to execute.

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

Thanks, Bill. We hope this discussion has been helpful. We're grateful for your continued interest and support, and with that, we'll be happy to answer questions. Sabrina?

Thank you.

(Operator Instructions)

Our first question comes from the line of Jordan Sadler of KeyBanc Capital Markets. Your line is now open.

Hello. Good afternoon, guys. This is Jeff Gaston on for Jordan.

Oh, hello, Jeff.

Hello. A few quick questions for you. Do you have your current EBITDAR coverage ratio for your portfolio?

We do. It sits for the entire portfolio and we report this on a quarter lag. EBITDAR is about 1.94 times for the entire coverage. Ensign sits at around 2.05 times as of December 31.

Great, thank you. And then, on this quarter's earnings calls, Kindred and Genesis both described following lengths of stay and census stays without seeing any benefits from greater shares yet. Now, I know that you mentioned Ensign, and so Ensign also reported that they were capturing share in an uncertain environment, but what are you hearing and seeing from your tenants?

Yes, you described it well when quoting Ensign. They talked in some detail about what they're experiencing and it's quite a contrast to what others who are experiencing in this space. They're doing really well.

In fact, they see, as their length of stay comes down a little bit, they are capturing more of that share and overall revenue is increasing. So like I said in my prepared remarks, we see what's happening now as an evolution of what's been going on for the last 15 years. Ensign was a really early adopter of the -- I should say, they embraced really quickly the move to managed care and operating in a heavy managed care environment has prepared them especially well for the changes that are now coming from the hospitals in terms of the Medicare patients.

So they're used to taking care of patients better, faster, communicating, collaborating, showing the data, and that's why I think they were able to explain their superior performance on yesterday's call. The other [Smith] operators that we've brought on have that same talent set that we brought over, that we have with Ensign, and so we're seeing the same type of performance by our other tenants as well.

Let me just add something to that, Jeff. If you think about our non-Ensign skilled nursing tenants, it's primarily Trillium and Pristine, and both of those portfolios are fairly new. The Pristine portfolio, we acquired last October, and the Trillium portfolio, we just acquired in this last quarter.

In both cases, those portfolios were basically running as primarily Medicaid shops. So, for them to -- any comment that we could make about what's happening to them in terms of their skilled mix or skilled revenue has to start from and acknowledge the fact that, whether they get their next patient from, as a Medicare fee-for-service patient or a Medicare Advantage Managed Care patient, or just a straight HMO patient, wherever -- or even the Medicaid skilled patient, that's all an improvement in mix over where they were before and it's kind of gravy.

So they really have no place to go but up, regardless of what is happening with all of the other guys that are used to having a lot of Medicare skilled mix in their portfolios.

Okay, that's very helpful. Thank you. One last question was, so there's some concern about some smaller operators, the moms and pops as far as being able to compete with larger regional operators. What are your thoughts on that?

Yes, we are firm believers that size really does not determine success on the skilled nursing space. Healthcare is, if there's ever a business that's a local business, it really is skilled nursing.

If you take some of the great regional, divisional, executive type people from the bigger companies and they want to start their own business, and they start off small, of course, the chances of success are very, very high with them because they have the sophistication and the knowledge of big company systems that are required to manage the change in environment, but they also have the advantage of having that high-touch local ownership feel that a small company brings to the table for both their employees and then their residents and patients.

And their relationships with the hospitals and health plans who are the local decision makers, so I would say we're size agnostic. Big boys can do great if they have the proper talent in place on the local level, but also, the smaller guys, if they come with the talent and knowledge and commitment to quality care, also will do exceptionally well.

You're not concerned about, I guess, the scale of their operation and being able to partner with health systems and hospitals?

That's a good question and it really depends on the market. Hospitals are, as you're alluding to, are narrowing their preferred provider networks. What they look at, at their criteria, there's several points that they look at to determine what facilities should be included in their network for a particular hospital.

I haven't, we haven't seen yet hospitals that are turning down local operators because they're not affiliated with the large regional or national chain. If you have, as a facility, the data that supports inclusion in that preferred network, those quality outcomes are what's going to drive it, not some arbitrary metric of whether or not you're affiliated with the big chain.

For example, if you're a big part of the chain, but your readmission rate to the hospital is 20%, and you have a small local mom and pop whose readmission rate to the hospital is 5%, the hospital can't ignore that. And they are always going to, now more than ever, factor in that data more than other considerations before.

All right, thank you. That's it for me.

Thanks, Jeff.

Thank you. And our next question comes from a line of Chad Vanacore of Stifel. Your line is now open.

Hello, good morning. This is Seth Canetto on your Chad.

Hello, Seth.

First question, I just wanted to ask on your commentary on the pipeline. It sounds like the mix of assets is going to be more skilled nursing than senior housing. Is that fair to say?

Yes. It's about 60/40, SNF to ALF.

Okay. All right, great. And then on the guidance, did the FAD guidance decrease by a penny? Could you explain that?

No, FAD guidance actually decreased by a penny and that's due to the add backs, typically amortization of deferred financing fees as well as amortization of deferred stock. Those numbers stayed the same, but we now have a bigger share count, so it's decreasing that add back.

All right, perfect. And then just looking at how you guys acquire new SNF assets and you bring in operators, and you under-write those assets.

How do you take into consideration the shorter length of time towards implementation of CJR and BPCI in the sense that the operator has less time to prepare those employees for those changes? Is that a big impact when you're underwriting assets?

We certainly think about it, but these operators are not new. They are out there; they're around. They're already doing things and for them to move into a new facility, new property with -- the first thing you do when you move into new property is install your own people, culture and systems.

Addressing CJR, if they are moving into a CJR market, and we have relatively few properties in CJR markets right now, but we expect those programs to expand later. But if you are moving into CJR market, that's just one of the many things that you would be prepared to address.

And remember, most of our assets are so Medicaid-heavy they weren't getting the hips and knees from, taking into consideration in our underwriting, so it's not as if we're looking at a Medicare average daily census that we expect to shrink. In fact, there's very little Medicare market share there. So if they move into a CJR market, as Greg alluded to, it's about getting the systems in place to be able to take those patients on a go-forward basis.

Okay, thanks, and last question, I think you guys mentioned last quarter of the star rating changes that should affect 2017. Is that a concern for operators with less than three stars? And I guess what's your mix of tenants as far as the star rating system goes?

I'll let Mark talk about the mix of the star ratings, but just a little bit of color about how our operators view it. We're in the early innings of hospitals using the star ratings for, as a criteria for their preferred networks. There's obviously the three-star cutoff for the CJR, for the three-night qualifying stay waiver, but what that does is it creates a little bit more time in some cases for the two star or below facilities to qualify to be part of those preferred networks.

In some cases, hospitals have a pretty clear cutoff. If you aren't three star or above, they are not going to include you, and so it takes some time. It can take one to two to three years to move significantly from one star up to where you want to be. Having said that, I sort of started by saying we're in the early innings because that's such a blunt tool for hospitals to use.

It's not effective because it doesn't accurately reflect quality. That's why they added the readmission rates to the quality measures for the star rating, but the way they did that, to us, doesn't seem to, they fold it under the quality measure component and so it's not going to be as potent of a swing measurement, if you will.

At the end of the day -- so we believe that hospitals will evolve and pay more attention to that readmission rate data than to the less sophisticated star rating, if you will. So as we under-write deals, we look to see what the star rating is and to see if that particular hospital market has a star rating ceiling or floor for their preferred networks and then just how long we think it will take them to get into that market.

And I'd like to add, if you look at the changes that are taking place to the five star rating, they're focused on short stay patients that are -- our operators are focused on re-admissions, patients not bouncing back to the hospital shortly after getting to the SNF. So our operators that we've vetted out, they are already doing everything that they need to and they're prepared to, as they take on these facilities, to insure that patients aren't bouncing back. And so they are actually aligned with what changes have taken place with the five star rating.

So we actually, some people have asked us over the last couple of weeks, with respect to our particular portfolio, and we have, of our 108 SNFs, we have 35 facilities that fall in the one and two star range. Of the 35 facilities, 12; six came with the Pristine acquisition and six came with the Trillium acquisition. Then of the 23 remaining facilities that were not part of either of those acquisitions, 10 to 12 kind of fell down to the two star or the one star level as a result of a complaint visit or an annual survey by the Department of Health.

And so we view those 10 to 12 as having a high probability of bouncing back up into the three star range over the next, I would say, year or so, just depending on how quickly the next survey comes. And then the balance would just, as we looked and took a look at the facilities specifically, kind of where they fell, a lot of the facilities fell in tertiary markets where staffing has historically been a little bit tighter.

And then also in markets that are less focused on the star rating where a facility may be one of two or three nursing facilities in the entire town. So we're pretty happy with the portfolio and where the star ratings are lining up and we would expect that as some of the facilities that have experienced some inspection challenges, as they have their next annual inspection, we should see them pop back up into the three and four star range.

Great, thanks so much.

Thank you and our next question comes from the line of Paul Morgan of Canaccord. Your line is now open.

Hello, good morning. Just a quick follow-up on that last comment there. So you mentioned that six, I guess, a dozen of the 35, one and two stars were with Pristine and Trillium. Are those assets where you don't expect movement because there's less focus on it or are those in the kind of other category where you could see them bouncing up to the three star range?

Yes, Paul, this is Greg. So just let us give you some perspective on that. In order to move star ratings -- star ratings follow a facility for three years and it doesn't matter if the facility has changed hands and has a new operator. If you walk into a one, it can take you up to three years to rack up enough good survey results to get yourself back up into the four and fives.

So, and again, part of Mark's point was that if you look at the 108 SNFs in our portfolio right now -- if I'm doing the math right, 73 of them are three star or above so we're not worried too much about those at all. And those threes will probably continue to move up toward fours.

And then about three dozen of them are in the one and two star, but two-thirds of those -- or about a third of those, are facilities that have recently come into the portfolio and are dragging behind them the prior operator survey history.

One of the great things that we do is that we find assets that, while they are stable, we think that they are under managed and can be significantly improved merely by the insertion of a great operator who is sophisticated, committed and knows what they are doing.

And that's exactly what we've done with those assets, but the Pristine assets have been with us for about six months now and we're just starting to see that movement and the Trillium assets have been with us for a couple of months now and it will be a while before they move up, so that's why we can say that we're pretty happy with the overall distribution. I think, as it sits, the overall distribution of five star ratings in our portfolio is better than most and we know that these things are barely getting started.

Do you have any, are there any metrics you can provide or maybe color around, now that you're six months into the Pristine deal and the transition there, how that is progressing versus the pro forma as they took over?

Yes, so when we go from, when we experienced this at the Ensign Group for all of the time that we were there, as you know, our MO there was to take the stress assets and turn them around, largely Medicaid shops, and turn them into skilled short-term rehab facilities. In this case, as you know, the Pristine buildings were kept -- Medicaid shops, but cash flowing really nicely.

Nevertheless, the strategy that Pristine is pursuing is to convert those long-term care shops into more short-term rehab facilities. So our pro forma matches our experience at Ensign and Chris' experienced before, and that is that you're going to ramp up a little bit the cost structure on the outset to build the clinical capabilities on your nursing and rehab team and you're going to build a little bit, invest a little bit more in marketing in order for that to happen.

While you're doing that, you can still see some modest increases in your skilled mix just by paying attention to it. That's what our model predicted and that, just in general terms is exactly what we're seeing so far with that transition.

What did you see as sort of a stabilized coverage for that deal? Could you remind me of that?

It was about 140% to 150%. We saw it is somewhere in the 12 to 18 month mark, that he should be somewhere in that range, in the 1.4 to 1.5 times. Because it was going to take, we thought there would be some incremental expense that they would pick up early on.

Then we thought, call it, months three through nine, we would expect to see them start to hit their stride and fully bake in all of their transitional expenses and really start to hit their stride on the marketing side. So I would say towards the end of this year, we would expect to see 1.4, 1.5 on an EBITDAR basis.

Okay. And then, just on the acquisition pace, you mentioned sort of building back up kind of the pipeline. Is there any, as you close the deals that you've already announced in the second quarter, is there any reason to think that the pace of acquisitions in the back half of the year would look any different in terms of volumes -- and then, I guess, in terms of mix, although you gave us the 60/40, I think, number there? But just in terms of the amount you think you can achieve in the second half of the year.

Well, you know, we said we're pretty optimistic about the pipeline and what we think we can do through the rest of the year and into the future. But remember, at our size, quarter-by-quarter, looking at acquisitions, it's going to be a little lumpy. So it would be, while I would love to be able to project that we will replicate Q1 in the other three quarters of the year, or exceed it, I'm not sure that we can do that.

But I do think we'll have a much better year than the $233 million in capital deployment year that we had last year and we are optimistic as we look at the pipeline and the kind of deals that are crossing our desk every day, that the opportunities are going to be out there for us.

Okay, and then just lastly, do you currently expect to buy, to exercise the option to buy the asset that's underlying the pref?

You know, it's a little early to tell on that. I figured we wouldn't have done the deal if we didn't expect that, in time, we would be exercising that. But they just barely started taking deposits and doing lease up, opening that thing. They've scheduled a grand opening, I think, for July, right, Bill?

End of July.

End of July, which will give them some time to get through sort of the, all of the start up stuff, and I think probably over the next couple of quarters, we will get a much clearer picture of how that thing is going to lease up and how it's going to run. We sure like the tenant. We sure like the location.

We definitely like the facility. It's beautiful. Mark and I were up there not long ago and toured it and it's going to be a great asset and I do think we'll -- my expectation is the same as it was.

We will exercise that in due course, but we will see what due course is.

Okay. Great, thanks.

Thank you and our next question comes from the line of Jonathan Hughes of Raymond James. Your line is now open.

Good afternoon, guys. Congrats in the quarter.

Thank you.

Earlier, Mark had mentioned tight staffing in some markets, but are your operators seeing any increased wage pressures? Just kind of wondering if there's any impact on labor costs from the nationwide push towards higher minimum wages that could impact coverages for your tenants.

Our operators haven't expressed that concern to us yet. As we've talked to them about the minimum wage initiatives in their states, they have reassured us that they feel comfortable with their cost structures and being able to absorb that.

In the skilled nursing space, there's not a lot of the labor that's in that minimum wage amount as it stands today anyway. And there's some optimism in California, for example, that the very strong state association there will be able to help those providers to make up that different as that rolls out over time.

Okay. All right. Thanks for that. And just looking at acquisitions, are sellers becoming more reasonable on pricing expectations? Have they adjusted to your higher underwriting requirements that you guys talked about last quarter or are they still expecting pricing from say nine months ago?

Yes, they have for the present, Jonathan. The deals that we have in the pipeline now reflect -- and then the deals that we did in Q1 were really deals that we made in Q3 and Q4, those deals we closed in Q1. The deals that we have in the pipeline now that would be our Q3 and Q4 deals this year do reflect the increased underwriting standards that we imposed at the end of 2015.

Whether that holds or not is a question mark. I think we're going to see some of the buyers who have been absent from the market for the past three or four months start to return now and we'll just have to see if most of them have been expressed the same thing we have that they think that cap rates should tick up a little bit, but we'll see if that discipline holds.

Okay. And have you seen any deep multi-asset deals kind of circle back around that might have fallen through at the end of last year?

Yes, but we aren't pursuing them.

Okay, and then one more. Have your underwriting expectations changed in terms of rent coverage in recent months on SNFs and senior housing assets and how do you see this maybe potentially changing in the future?

No, our expectations haven't changed, but remember that our view seems to be slightly different from some of the others. Whereas there tends to be a prevailing view amongst healthcare REITs that when you see an asset that's new and beautiful and 98% occupied and has a 60% skilled mix and is hitting on all cylinders, that's the asset that you want to go out and pay top dollar for, pay a premium for. And in our view, that asset really, and you may skim your coverage down for that and we've seen a lot of folks do that historically.

We don't like that. We think that, that asset has no place to go but down, so if it's already at 98% occupancy and 60% skill mix, we darn well better get 1-5 coverage on that asset, and in that environment, we tend to be not competitive on price. The assets that we like are the ones that are 80% occupied, but stabilized and cash flowing, that have some upside left in them; there's some meat on the bone there for a new operator coming in that we would be bringing.

We can get those at a much better price. We'd actually skinny the coverage on that one before we'd skinny the coverage on the first one with the premium price, because if we know the operator, we know their business plan, and we, with our background and perspective as operators, can say yes, that's very likely to work.

That's one that we might stretch for and skinny our coverage down on a tad to keep our yield up and let them grow into that coverage, which they would typically do in our underwriting within 12 to 24 months. So we might skinny that coverage down to 1-4 or even a little below that on an asset that we view as stable with great upside.

Okay, that's great. Thanks for the color. Appreciate it, guys.

Thank you and our next question comes from the line of Michael Carol of RBC Capital Markets. Your line is now open.

Hello, guys. This is George Clark on with Mike. I was just wondering, do you guys expect RAC audits to cause disruption in your portfolio or are there any tenants that could be audited?

Every tenant could be audited, George, but we don't expect any disruption from RAC audits. RAC audits have been around for a long, long time and the only reason they have been in the news lately is that the CMS sort of alerted RAC auditors about some new things that they thought they ought to look for.

But those new things aren't really the kinds of things that our tenants are typically dealing with, so no, the short answer to your question is no. We don't see a big issue there.

Okay, and then in terms of your pipeline, do you guys expect to add any new tenants to your roster in there or is it mostly just relationship deals?

We're just staring at it for a minute. There's a couple new tenants in there in the existing pipe. Out of eight or nine deals, six or seven of them are going to go to exiting tenants, should we close them, and then the rest would be new folks coming in.

Okay and then could you give some color as to why you guys filed the non-timely 10-Q? Is there any reason other than just trying to gather data?

Yes, this is Bill. I can give some color on that since it's my responsibility. In building out our reporting calendar for this quarter, I incorrectly assumed that we were still a non-accelerator filer.

We actually became an accelerated filer at year-end. A non-accelerated allows for 45 days, whereas accelerated filer is 40 days and we reported on day 41, so technically, we were non-timely, which required us to file the Form 12b-25.

All right. That's it for me. Thanks guys.

Thank you.

Thank you and our next question comes from the line of Duncan Brown of Wells Fargo Securities. Your line is now open.

Hello, guys. Thanks for the color on the call. Just two for me.

You've obviously got leverage down pretty nicely here and sounds like you have a nice pipeline. Can you remind us how high you're willing to take it over the near- to intermediate-term to close on some of those deals?

Yes, that's a great question. So what we've said from the beginning was that we were going to not try and get our leverage metrics down to where we want them to be all in one jump, that we would ratchet those down, do deals, raise equity, do deals, raise debt equity and try and be smart about it and we have.

That's exactly what we've done, is ratcheted down and so our target range on a debt to EBITDA basis is about 4.5 to 5.5 times. We might float a little bit above that. We have the debt capacity to do that on a revolver, to make acquisitions, but we would then want to bring that back down again.

And if we can keep the debt to enterprise in the 30% to 40% range, we believe that's optimal for us and that's where investors would like us to be as well. So we will not be willing to go too high above those ranges and we will always seek deals that are accretive and worth whatever we're paying for them to make sure that we return value to shareholders when we do.

Okay. I appreciate that, and congrats on the S&P upgrade and I appreciate the commentary on the ratings strategy, if you will. Would be curious if you could provide any color on your commentary or conversations with Moody's and anything that they are particularly looking for before you get the next bump on their side?

So we met with them a couple of weeks ago when we also met with S&P and they're just looking, they wanted to see the transition of Pristine into our portfolio and see these first-quarter numbers. So now that we've reported, I'll be circling back with them and getting a better feel for where they are at.

But when we presented, they had, when they originally came out with their rating, they had given us like five targets, what could change our rating up. And when we went in and presented the numbers, we felt we checked each one of those five criteria. So it is the hope that they will see that as well and see the progress that we've made, like S&P did, and give us an upgrade, a notch upgrade as well this year.

Great, thanks a lot.

Thank you.

Thank you and I'm showing no further questions at this time. I'd now like to turn the call back to Greg Stapley for closing marks.

Thanks, everybody. We appreciate you being with us and we welcome you to give us a ring any time you have any other questions. Thanks, Sabrina, and everyone else.

Thank you. Ladies and Gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.