CareTrust REIT Inc (CTRE) 2017 Q1 法說會逐字稿

Welcome to the CareTrust REIT's Q1 2017 Earnings Call. Please note that this call is being recorded.

I would now like to turn to time over to Josh, CareTrust REIT's General Counsel and Secretary. Please go ahead.

Thank you, Sherry, and good morning. Before we begin, please be advised that any forward-looking statements made on today's call are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financing 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 our 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, during today's call, we will supplement our GAAP reporting with non-GAAP metrics, such as EBITDA, normalized EBITDA, FFO, normalized FFO, FAD, and normalized FAD. When viewed together with our GAAP results, we believe these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. Except as required by law, we and our 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 for any other reason. Listeners are also advised that today -- yesterday, we filed our Form 10-Q, accompanying press release and our quarterly financial supplement, each of which can be accessed on the Investor Relations section of our website at www.caretrustreit.com. A replay of this call will also be available on the website for limited period.

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

Thanks, Josh. Good morning, everyone, and thank you for joining us today. With me today are Bill Wagner, our Chief Financial Officer; Dave Sedgwick, our Vice President of Operations who joins us from our East Coast office; Mark Lamb, our Director of Investments; and Eric Gillis, our Director of Asset Management who joined us from our new Midwest office in Kansas City.

CareTrust posted a good start to 2017 with $55 million in new investments in the quarter and an average weighted cash yield of 9.2%, and we have more in the pipeline. We also further strengthened our balance sheet by responding to heavy demand for our equity through our at-the-market equity program, which moved approximately 7.2 million shares and generated about $108 million in net proceeds in the quarter. We welcome the several new investors who've joined us through that avenue and thank them and all of you for your support.

Also, during the quarter and since, our credit rating outlooks were revised from stable to positive by both Moody's and Standard & Poor's, offering the prospect of additional improvements to our cost of capital in the future.

And finally, we welcomed Eric Gillis as our Director of Asset Management. Eric was one of our most well-respected operating partners back in our Ensign days. He comes to us with a wealth of knowledge and experience in both skilled nursing and seniors housing operations and his presence substantially bolsters our already strong by operators, for operators expertise and brand. In addition to monitoring the health of our physical plants, Eric leads our effort to help our tenants identify untapped opportunities for improvement within their existing operations. This has the potential to add great value for both our tenants and for our investors since any facility level and operational improvements directly strengthen the value of our portfolio. We're happy to have Eric on board today for his inaugural asset management report.

So with that, I'd like to turn it over to the team now for more details starting with Dave.

Thanks, Greg. Q1 was a nice start to the year, as we were able to help one of our existing seniors' housing operators, Premier Senior Living, expand their footprint into Michigan, and we also began a new relationship with WLC, a skilled nursing operator in southern Illinois. Led by industry veterans, William Kaplan and Bob Borsody, Premier runs 20 seniors' housing locations in 7 states. WLC is run by Scott Stout, who is the longtime COO of the 5 facilities southern Illinois portfolio we acquired, making the transaction much like a sale-leaseback with its minimal transmission risk. Both Premier and WLC are outstanding operators, and we look forward to growing with them.

In addition to these latest acquisitions, I want to take a moment to applaud our largest tenant, the Ensign group. On Monday, they announced very strong quality metrics and earnings, posting record quarterly revenues yet again. Ensign is a company that is truly built to last with an exceptional core of leaders at all levels and a sterling balance sheet.

With respect to the broader skilled nursing industry, let me just take a minute to address last week's CMS announcement that appears to have made larger waves than we think it should. As long time operators ourselves, we've seen and managed through many changes from both CMS and the states. In addition to the long expected 1% rate increase, those negotiated and known in 2015, in connection with the Doc Fix, CMS also issued an advance notice that proposed rulemaking, commonly referred to as a pre-rule, that may or may not be adopted in time. Experience has taught us that a pre-rule will almost always change dramatically from the time it's announced to the time when and if it is ever implemented. This particular pre-rule is based on the ongoing SNF payment models research project, which is really just part of a larger perpetual dialogue between providers and payers around continuing efforts to improve our health care system. This particular iteration explores possible alternatives to the current reimbursement formula for rehab patients. Among other things, it includes proposals that could lessen the regulatory burden on providers and, thereby potentially lowering the cost of care. But at this stage, it's simply too early to estimate the potential impact of a pre-rule that will surely evolve before it's implemented, if it is ultimately implemented.

To the extent that it is, remember that CMS historically gives operators plenty of lead time to prepare for any material changes in regulation or reimbursement. Ensign CEO, Christopher Christensen, spoke positively about this development during their earnings call on Monday. We echo his sentiment, which essentially is that to the extent that reimbursement changes align incentives for better care, the better operators will welcome and benefit from it just as Ensign has over the last couple of years.

For our part, we're staying in front of these developments as well as similar discussions around value-based systems and other changes, which allows us to actively and intelligently monitor our current and prospective operators ongoing preparations to manage smoothly through whatever changes these discussions might eventually produce.

So we remain optimistic about the industry and its prospects. Most importantly, we have some really outstanding operators in our portfolio and several others waiting in the wings.

With that, I'll turn it to Mark to provide some more color on both our recent investments and the pipeline. Mark?

Thanks, Dave, and hello, everyone. As Greg mentioned, we kicked off the year with $55.3 million in new investments. The first was a $26.1 million acquisition of 2 senior housing communities located in the Milwaukee Metro area for our existing tenant, Premier Senior Living. The Milwaukee investment generates annual cash rent of $2.16 million for an initial cash yield of 8.3%. In March, we added a 5-building skilled nursing portfolio located in southern Illinois with WLC Management. The $29.2 million investment produces initial cash rent of $2.9 million for a going in-cash yield of 10%. Combined, these investments yield 9.2% on an initial cash basis and carry CPI-based escalators for future years.

We currently have other properties under contract that we anticipate closing within the second quarter. In fact, some of these have already completed diligence and are merely awaiting licensure from the state. And we are, of course, working on much more beyond that.

High-level. We have tightened our underwriting standards again since the first of the year with a 5 bp increase in our target going in-lease coverages and yield target is about the same. So as of now, we benchmark our senior housing deals to the target coverage of 1.25x with yields in the low 8s. And our SNF deals to a coverage of 1.45x with yields in the mid-9s. We then adjust those targets slightly based on things like operator, location, condition of the physical plants, and other relevant factors.

Regarding coverage. Please remember that when we started with the Ensign portfolio, which runs coverage at over 2x, and Ensign is now under 50% of total revenue. Coming from this high-level, as we continue to diversify our tenant base with market-rate deals, we will naturally and inevitably see our overall coverages decline, but we continue to seek solid individual coverages with sound tenants and as Eric will highlight (inaudible) working with our tenants to be sure those coverages are where we expect them to be.

The acquisition market continues to be competitive for both senior housing and skilled nursing assets. While we're seeing a slight decrease in the volume of opportunities coming across our desks, our current acquisition pipeline, which includes both on- and off-market deals remains in the $100 million range, with a mix of both senior housing and skilled nursing assets.

It includes some potential new operators to us as well as new states. Please remember that when we quote our pipe, we only quote deals that we are actively pursuing, which meet the yield and coverage underwriting standards I just described. And then only if we have a reasonable level of confidence that we can lock them up and close them.

And with that, I'll hand it to Eric to discuss asset management.

Thanks, Mark, and hello, everyone. There's been plenty to do since my arrival at CareTrust in February, so let me start by saying how excited I am with what we doing here and how enthusiastic we are to support our great tenant operators.

Consistent with our by operators, for operators philosophy, our approach to asset management involves far more than just making sure that properties themselves are kept up by our tenants. Because the long-term value of our portfolio is meaningfully influenced by the operational performance of our tenants, we delve deeply into their businesses, doing so with a level of understanding that can only come from our long and deep background in operations. And when we do, we inevitably see things that our tenants can do to improve their operations and by extension our lease coverages.

To date, I have been able to personally meet almost all of our 17 tenants and tour a sizeable chunk of non-Ensign assets in our portfolio. And with respect to Ensign, after 8 years in the trenches there, like other shared care trusts, I know many of their facilities quite well.

Among other things, our asset management team is currently focused on our Ohio operator, Pristine Senior Living, which took over the operations of our 16 property Liberty acquisition about 18 months ago. Since then, Pristine has worked hard to improve clinical outcomes, remedy deferred maintenance, build census, grow skilled mix, increase revenues, and improve star ratings with some notable successes. Several of their facilities are doing just fine. But following a draconian Medicaid rate cut in the Cincinnati market last year, a few of the more southernly operations have struggled to keep pace. This, as well as some other external and internal challenges, including the resignation of their former CFO after the unexpected passing of his wife last year, has caused the transition of that portfolio from a pure Medicaid play to more of a short stay rehab model to take longer than originally anticipated. In response, we had helped them identify key areas of opportunities for improvement.

In addition, following an inadvertent failure to pay some property taxes after the loss of their CFO, we have also implemented and helped with the bed tax and property tax impound system to assure both Pristine and ourselves that those important obligations are fulfilled. With this input and assistance, Pristine has crafted a clear and achievable plan to improve operations which we are monitoring, and we'll continue to provide help and insights to them and our other tenants as needed.

And with that, I'll turn it over to Bill.

Thanks, Eric. For the quarter, we are pleased to report that normalized FFO grew by 48% over the prior year quarter to $19.3 million and normalized FAD grew by 45% to $20.4 million. Normalized FFO per share grew by 7.4% over the prior year quarter to $0.29, and normalized FAD per share grew by 3.4% to $0.30. Given our most recent dividend of $0.0185 per share, this equates to a payout ratio of 64% on normalized FFO and 62% on normalized FAD, which, again, represents one of the best covered dividends in the health care REIT sector.

Under our ATM Program, for the first quarter of 2017, we sold 7.2 million shares at an average price of $15.31 resulting in net proceeds of approximately $108 million. We used the funds to pay for the $55 million of acquisitions closed during the quarter and we used the remainder to help pay down the outstanding balance under our line of credit from $95 million at year-end to $27 million at the end of the first quarter.

In yesterday's press release, we slightly revised our 2017 guidance. We still expect net income per share to be $0.60 to $0.62 and normalized FFO per share to be $1.11 to $1.13, and now normalized FAD per share to be $1.17 to $1.19. This guidance includes all investments and all shares issued under the ATM announced today, a weighted average share count of 71 million shares, and relies on the following assumptions.

One, no additional investments nor any further debt or equity issuances this year. Our outstanding balance on our $400 million revolving line today is $37 million. No rent escalations for any of our re-leases. Our total rental revenues for the year again, including only acquisitions announced to date are projected at approximately $111.5 million. Our 3 operated independent living facilities are projected to do about $400,000 in NOI this year. Interest income of approximately $620,000 on the 2 preferred equity deals that we closed in Q3 of 2016. Interest expense of approximately $23.5 million. In our calculations, we have assumed a LIBOR rate of 1%, that plus the current grid-based LIBOR margin rate of 185 bps on the revolver and 205 bps on the 7-year term loan make up the floating rates on our revolver in term loan. Interest expense also includes roughly $2.3 million of amortization of deferred financing fees. And lastly, we are projecting G&A of between $9.1 million and $10.1 million, which equates to under 8% of total revenues and again, without reference to any additional growth in our asset base or revenues this year. We have driven that percentage down every year and intend to continue doing so. Our G&A projection also includes roughly $2.4 million of amortization of stock comp.

As for our credit stats, calculated on a run-rate basis as of today, our debt-to-EBITDA is approximately 3.75x, leverage is about 24% of enterprise value, and our fixed charge coverage ratio is approximately 5x. We also have approximately $12 million in cash on hand.

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

Thanks, Bill. We hope this discussion has been helpful. We thank you again for your continued interest and support. And with that, we'd be happy to answer questions. Sherry?

(Operator Instructions) Our first question comes from Jordan Sadler with KeyBanc Capital Markets.

So first question is regarding the pipeline. Any insight you can offer into any changes in pricing or seller expectations in the wake of CMS' announcement?

Jordan, this is Mark. It's way too early. Obviously, that was just announced last week, so a lot of the brokers are getting their arms around what the changes are and frankly, we just haven't -- we haven't seen or heard of this come up at all. So way too early for sellers to even contemplate this.

And what about for buyers? I mean, so you're -- in terms of your underwriting, you've got $100 million pipeline plus it sounds like you've got quite a bit behind it. Even though the second part of the announcement, the pre-rule that you guys ran through, how does that factor into your underwriting?

This is Greg, we can't tell you how other buyers are going to behave. But for us, our behavior is probably not going to change much and that's because we're already very operator-focused to begin with. When we look at an acquisition, first question is who's going to run it, whether it's a sale-leaseback or somebody else just to be transitioned in. And one of the first questions we always ask about of those operators is how sophisticated are they, are they staying in the front-end of the changes that are constantly happening in the industry whatever they are, and are they well equipped to handle them. So for, us this really doesn't pose any kind of big challenge or change.

Is that more of a function of the types of assets that you guys have chosen to pursue, meaning, are the assets that you're focused on the just less exposed to even know what's proposed by the pre-rule?

Well, that's a good question because some of the assets, for example, the Liberty portfolio that Eric just talked about was pretty much a pure Medicaid portfolio when we took it over. And when you do take a Medicaid portfolio over, it doesn't really matter. If you got an operator in there who's going to shift it to more of a short stay rehab model, everything they do on that front is gravy. And so it doesn't really matter what is going on in the Medicare program, as long as you're confident that the operator knows it, and knows what to do about it. So really again, just always comes back to who the operator is and how well they are able to execute on their plan, whatever it is.

Okay. And then just following up on the conversation regarding Pristine Senior Living. Will there be or has there been any rent abatement or any fallout that we should be unaware of as it relates to the overall -- I guess it's a master lease? And then can you give us an update on what the in-place coverage is there?

This is Greg again. There's been no rent abatement. They've not missed a rent payment or anything like that. And they have a great plan for working through the challenges that Eric discussed through his part of the call. And in terms of their coverage, I think what we've always told the market is this. From when we acquired the Liberty portfolio that they run back in October of 2015, it was a pure Medicaid portfolio, they do intend and are working on transforming it to more of a short stay rehab model, they have had some successes on that front and I think there's more to come. And we all -- I've always been clear that our expectation was that they would take that starting coverage they had, which was fairly low and take, actually take a couple of steps back before they got the changes they needed to make implemented and started moving forward. So while we don't give out individual coverages on the individual tenants, they are covering our rent, they're paying our rent, and we are very optimistic about both their near and long-term futures.

And then just one last one, if I may, on the assumptions and guidance, maybe for you, Bill. I thought you said you're assuming no increase in terms of the CPI escalators and I just wanted to clarify, we should be, if we want to just try and model this as precisely as possible, we should be focused on the April or May CPI print for the increase that, let's say, Ensign would see?

That's correct, and currently on our latest renewals that we've been doing, we've been getting between 2% and 2.5% CPI bumps for the leases. And right now, from a sensitivity standpoint, a 1% increase in CPI on leases remaining to have bumps the rest of the year, will generate -- a 1% increase will generate a $0.01 increase to guidance. And then a 2.5% CPI bump will generate about $0.02. So it's no longer 1% for $0.01. It's 1% and then 2.5% for $0.02.

Our next question comes from Paul Morgan with Canaccord.

Just following up on that question about CPI bumps. So the 2.5%, that, and your $0.02 to guidance, that's not an annualized number, that's just for fiscal '17, correct?

That's correct.

Okay. And that includes not just the Ensign bump, but the bumps that will be later in the year for the smaller portfolios?

Yes, correct. We got pretty much 3 large tenants left this year that have CPI bumps. Ensign goes in June, Pristine goes on 10/1 and then PNG goes on 12/1.

Yes, okay. And then you mentioned in terms of kind of the investment pipeline, you still got the healthy amount that's coming in your near-term pipeline, but you also alluded to maybe a little bit of a slowdown in kind of what you're seeing out there. Is there anything you can attribute to that? I know earlier in the year you talked about maybe trying to underwrite slightly higher coverage in the SNF portfolio and then I'm wondering if it's pushback on pricing or is it just kind of the number of opportunities you're seeing?

Yes, I think that there have been some portfolios that have bounced back to the market and so just from a transaction volume (inaudible) stuff hasn't closed, and so we're seeing deals come back. But for the most part just the velocity has slowed down over the last month or 2. I mean, there continues to be -- there's some big portfolios out there that are being chased, but they don't fit our coverage and yield metrics. And so that's why we're sticking to the 1s and 2s and looking to tack those on to our existing operator base.

You had, I think it was in the fourth quarter where you -- one of your deals came back to you. Are any of the things that are going to be coming back to market something you'd execute on?

Yes, I think there are probably a few that should bounce back that we are currently looking at and are hopeful on.

Okay, great. And just kind of lastly on Pristine, is it too early to say that -- I mean, coverage is reported in arrears and I'm just thinking about the first quarter. I mean is it a little early to kind of make a judgment whether coverage will have troughed or are you getting more confident that that's the case?

Paul, would you ask that question one more time?

Just in terms of the Pristine portfolio, I was asking whether it's kind of too early to make a judgment whether the coverage there kind of will be troughing, obviously with the numbers we're looking at is for the fourth quarter, so you probably know a little bit more than that. Any kind of thoughts about how this year might look in terms of their coverage?

Well, I think -- this is a Greg, Paul. As we've said from the outset, we expected that coverage to pull back as they reposition that portfolio to move into the new environment and that -- we've seen that indeed occurring. We think that they have hit bottom and they've kind of been bumping along that bottom for a couple of quarters now. And we see them now as being poised to grow again. That bottom was extended by the things that Eric mentioned, an unexpected rather large Medicaid rate cut in about half the portfolio and then some challenges associated with the back-office. But one of those challenges, they've absorbed now. They're still working on filling the slot in their back-office, but they do have an excellent plan and they are out now executing on it and how well they execute remains to be seen, but we're monitoring.

Our next question comes from Chad Vanacore with Stifel.

So you mentioned a hot M&A market or at least a competitive one and competition from operators, but also slowdown of pipelines and how we can reconcile that. Is that just specifically to markets or subset of opportunities that you're looking at that are slowing?

Yes, I would just say, right now, we're seeing a lot of kind of non-strategic assets that are currently flooding the market, whether it be other REIT's divesting or operators that are just cutting, call it, their non-strategic facilities that they, for whatever reason, want to go on a different direction on. So we're seeing a lot of opportunities there. Not stable, not great coverage, some buildings losing money. So that's kind of what we're seeing right now. There are portfolios out there, and small portfolios that do have good coverage and those are garnering a premium. So we're just not seeing the velocity that we have seen call it, 12 months from now.

Maybe I could put a little more context on for you, Chad. Last year, our underwriting team underwrote 393 deals. I mean, that's an astronomical number and we picked a dozen or so. Now -- right now, maybe we're on pace to underwrite 250 to 300 deals, so for us it feels a little thin, but that doesn't mean we won't find a dozen or so that we want this year. We're watching and it'll come.

So if you're not the winner of these portfolios or these nonstrategic assets, who's the buyer for them?

Yes, I mean a lot of it is private money, folks that are looking to bridge to HUD, and can get a little bit of arbitrage there. And then there are other REITs, so we hear, are chasing those as well.

Okay. And then just thinking about -- you mentioned as former operators yourself, you can add to an operator strategy. So what are some of the ways you're helping operators navigate through a tough period for skilled nursing?

This is Eric. We're able to really go in and be a partner with them at the ground level. So these last couple of months in some of our operators have been -- we've been able to go in and walk the buildings with them and be that second or third set of eyes for them as well and be able to create improvement plans upon that. And because of our operating background, we've -- one of us in the room has definitely seen the challenges that they might be facing, and we can offer that expertise to them and continue to help them. So we've been able to do a lot of that over the last couple of months, myself, honestly, our team has been doing that the since the inception of our company because of the background that we've had.

Okay. And then just one more question. It looks like you opened up use of the ATM. Can we expect you to use that more than, say, secondary offerings, just to kind of match fund as we go forward?

Yes, it's Bill. We used up -- the first ATM that we filed was for $125 million and we've issued $124 million, and so we're kind of on the sidelines right now with an ATM, but you can expect us in the coming weeks to put another ATM up and the ATM is just another tool in our toolbox to raise money to fund our pipe. If we collectively put together some investments that totaled a big enough number, I'd say -- and the equity markets were there for us, I'd say we'd probably go out and do a secondary to match fund against those as opposed to the ATM where our volume isn't high enough to cobble together enough to match fund against a collection of investments.

Our next question comes from Brian with RBC Capital Markets.

So leverage levels look well within your long-term targets. Going forward, how are you planning to fund future acquisitions?

This is Greg. Obviously, with the amount of liquidity that we have right now, we could fund a lot of our coming acquisitions simply off of our revolving credit line. $400 million line, only $27 million drawn at the end of the quarter. And our leverage is an all-time low, so we could run a long way before we ever get outside our target 4x to 5x debt-to-EBITDA range.

Okay, and then when you look at your operators, have you seen anything that would cause them to be put on your guys, like, internal watchlist and then I guess, kind of when you look at them, what are the requirements that would get an operator put on that list?

It's a hard question to answer because it assumes that you have some tenants you don't watch, and we watch all our tenants. We're still a relatively small firm, and we have the -- even though we're relatively a small management team as well, we have the bandwidth and the expertise to watch these folks very closely. So we're constantly interfacing with them. And the addition of Eric has been a nice supplement to that because he gets out and actually is able to be on the ground with them more often than we were able to. So everybody's on our watchlist, and we worry about every single one of them every day. And do our very best to provide to them with the insights that our backgrounds might provide us because sometimes when you're running operations day-to-day, it's really tough to see the forest from the trees and as Eric just said, that second, third set of eyes can be very helpful just in identifying the opportunities around you.

Our next question comes from John Kim with BMO Capital.

So the tightening of your underwriting standards by 5 basis points, can you just elaborate why you have done this? It sounds like you're not really influenced by the CMS announcement. So is it supply concerns or your experience with Pristine or are there other factors?

John, this is Mark Lamb. I would say, we just want to make sure, oftentimes when you're taking a look at a SNF, the transition can take sometimes a little while longer, I've seen, depending on the story in those particular buildings. And so oftentimes our operators will get in and need a little bit more time, and we can underwrite to, say it's 140, coverage, but it just gives us a little bit more margin of safety going to 145. And so we just found over last 3 years that a little bit more coverage just puts a margin of safety there for our incoming tenants.

Okay. And then on the experience with Pristine. Are you saying basically that they've been like the primary driver of your declining EBITDA coverage this quarter, or I'm just trying to understand what the message is with this?

Well, I think if you look at -- what I alluded to in my remarks is, as we are bringing more and more transactions into the portfolio, for instance, the PMG transaction we did at the end of last year, that was underwritten in the mid- to high-30s, 1.3x range, and so automatically that's going to pull coverage down. So as we continue to bring more transactions in, especially if they're senior housing and coverage is 1.2x, it's going to continue to pull our overall coverage down.

Okay. I think Dave mentioned in his prepared remarks that the 1% CMS rate increase was already agreed upon in the 2015 negotiation. But can you remind us if there's already been an agreement for the rate increase for 2019 or 2020, or was it just '18?

There hasn't. 2018, I believe was the last year of that change.

Okay. So was the disappointment in the market, it was that there was the concern that the 1% would have increased or...

That's a good question. There really shouldn't have been any disappointment in the market because it was expected by everybody. In fact, Mark Parkinson of the America Health Care Association mentioned that they were, as the lobbying group, they were thrilled that there wasn't any decline in that rate, so that shouldn't have been a newsworthy item actually.

Okay. And final question is on the use of the ATM. Bill, what metric do you primary look at when you decide to pull the trigger on it? Is it absolute share price? Or is it multiple or price to NAV? Or I'm just curious what you really look at.

We look at our NAV, and we look at the premium that we're trading to, and we tend to put a limit price out there with whoever's on our -- whoever is doing the selling and we won't sell below that limit, which is in excess of our NAV.

I think you'll also see us watching very closely for opportunities to match fund those raises to the deals we do, and the ATM is a really good tool for a company our size because we can raise $5 million or $10 million or $15 million in a normal month off of it, and that's a good one-off deal for us.

Your stock price today is above the average selling price in the first quarter, so would it be fair to assume that if you had that ability to do more, you would use it or is your balance sheet strong enough that it's not really necessary?

As we sit here today, we haven't really talked about it because it's not an issue because we don't have an ATM out there right now. But as we sit here today, I would tell you that we got plenty of dry powder and no pressing need to raise any equity in the near term.

Our next question comes from Josh Raskin with Barclays.

Getting back to macro. I mean, I understand everyone's sort of known since 2015 that 1% was coming, but now we're finally getting closer. And so I'm curious about how your SNF tenets are thinking about it? Should we expect sort of temporary decline in coverage, or do you think there's discussions around temporary escalators being held back or anything like that? Just from a financials perspective, how should we be thinking about it from the REIT side, the 1% increase?

Yes, so this is Dave. As we were talking about, because CMS gives quite a bit of lead time before they make either changes or increases, our operators have enough time to make any adjustments if they need to, so we don't expect coverage to materially change. There's no discussions at all about making any changes to rent or rent increases because of the 1%. Everybody expected it, they've prepared for it and it's just business as usual this year.

Okay, that's helpful. And then on the WLC Management deal, I guess, 2 questions there. One, it would be helpful to get a little bit of your background on that group, on your new partners there, and sort of what their size and scope is and what their plans are. And then understanding that you guys are underwriting to sort of a mid-9s on the SNF side and these were a little bit higher. What were some of the factors that pushed those a little bit -- pushed that yield a little bit higher towards the 10%?

Yes, great question. So a little bit color on the operator. Like I said in my prepared remarks, Scott Stout was the long time COO of that portfolio that we acquired. In fact, he initiated the whole deal, it was an off-market deal. We met him, he was one of these operators that we had kind of waiting in the wings to see if there was a deal in the future, and he took the initiative to bring this deal to us and the owner of the portfolio to see if he could buy him out and start his own thing. The beauty of that is that it's the same team, the same back-office, the transition as far as the residents and employees go from day one to the next is-- nothing skips a beat, so that's great. It reduces any transition risk that is inherent in an acquisition. And the reason we were able to get an exceptional yield and an above-market coverage at the same time is really because the market that it's in, it's in the state of Illinois, which has some overhang on it because of the state dysfunction that's there and the long time it takes to make Medicaid payments, and also being in a very rural setting of southern Illinois, those 2 factors kind of helped drive that cap rate. And the way we got comfortable with those is basically doing what adds up to a sale leaseback since its -- the existing operator is still running them.

Our next question comes from Jonathan Hughes with Raymond James.

Just 2 for me. Ensign mentioned they were closing some beds and facilities due to CapEx burdens and putting those beds at other properties or new properties, and I think you have some bed capacity as well. Could you just remind us of your views on development and if you see this as an avenue for growth in the future?

Yes, Jonathan, it's Greg. So they did close one property that was in our portfolio. Let me tell you exactly what that was. Several years ago, back at Ensign, we acquired a portfolio of assets that included basically what was an old converted motel in Victoria, Texas and we always knew that property did not have long to live and was going to be very difficult to keep up over the long term. And the day finally came when we had basically just said, look, it's not worth maintaining that physical plant anymore. Our net book on it is -- was small. And they basically agreed that if we would let them close it, they would continue to pay the full master rent and transfer the existing bed rights over to the other property that we own that they operate in that same community, and so that was done. With respect to those beds and the other beds that we have down in Harris County, we continue to preserve those beds, they are usable. We are exploring options for their redeployment, and it actually made a little bit of progress on the Harris County beds since we last talked to you. So we do have a small appetite for development but not a lot. And we have some good development partners in the wings that can help us with that, so that they don't become a distraction for this team, and so we do anticipate doing a little bit.

Okay. And that would be, what, structured as maybe like a preferred paper and you'd take it out once it's complete?

Yes, so that's been a very effective methodology for us now. We did the Arvada deal back in 2014, which is now in stabilization and looks really good. We have the 2 preferred equity deals underway in Idaho right now, one of which will come online later this year we believe and we're excited about that. And the Houston deals, we're currently working on exactly how those will be structured, but we have proposed a preferred equity deal with it, a very well-known and experienced skilled nursing developer down in that state.

Okay, that's helpful. And then maybe just one more for Dave or Eric. You've touched on this in the past but there've been some more news articles highlighting nursing and labor shortages in the Midwest and West Coast states. Are any of your partners concerned on how this may impact their operations? And are you concerned on how that may impact your coverage ratios? Just an update there will be helpful.

It's Dave. Yes, we've been talking with them about that issue. And I would say that yes, that there is concern about the labor pressures, but not more than is necessarily more than usual. I mean, since labor is, by far, the largest expense in these operations, it is always front and center for these guys. We've seen in some cases, a smattering of agencies which is the temporary nursing help that has to come in when labor gets really tight in some of the buildings. We've also seen that go away after a brief introduction. And I think as we have looked at labor cost going up annually somewhere between 1% and 2%, I think now, some of our markets are expecting more like 2% to 3%. So yes, it's definitely an issue that our operators are wrestling with and it's never going to go away. It's always something that they have to work on.

(Operator Instructions) We do have a follow-up question from Jordan Sadler with KeyBanc Capital Markets.

I just wanted to clarify a couple of things. One, did you mention if there was any ATM completed in April?

There was no ATM completed in April. We had issued all of the ATM through the middle of March.

Okay. And then one on coverage. The skilled nursing campus coverage declined sequentially from 1.81 to 1.57 that you show on Page 6 of your supplement. Those are for the same 16 facilities I think. Did you mention what was driving that specifically, is that Pristine?

We did not mention that. And part of it is going to be Pristine. I think maybe a good chunk of it is Pristine, but we'd have to get back to you on exactly what that is.

Speakers, I'm showing no further questions at this time. I would now like to turn the call back over to Greg Stapley, Chairman and CEO.

Well, thanks, Sherry, and thanks again, everybody for being with us today. And as always, if you have any other questions, always feel free to give us a ring. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all disconnect and have a wonderful day.