CareTrust REIT Inc (CTRE) 2017 Q4 法說會逐字稿

Welcome to CareTrust REIT's Q4 2017 Earnings Call. Please note that today's call is being recorded.

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 CareTrust REIT'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 risks and uncertainties that could cause actual results to materially differ from those expressed or implied herein. Listeners should not place undue reliance on forward-looking statements and are encouraged to review CareTrust's SEC filings for a more complete discussion of factors that could impact results as well as any financial or statistical information required by SEC Regulation G.

During the call, the company will reference non-GAAP metrics such as EBITDA, normalized EBITDA, FFO, normalized FFO, FAD and normalized FAD. When viewed together with its GAAP results, the company believes these measures can provide a more complete understanding of its business but cautions they should not be relied upon to the exclusion of GAAP reports. Except as required by law, CareTrust REIT and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, change in circumstances or for any other reason. Listeners are also advised that CareTrust yesterday filed its Form 10-K and accompanying press release and its quarterly financial supplement, each of which 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 for a limited period.

I will now turn the call over to Greg Stapley, CareTrust REIT's Chairman and CEO.

Thank you, Latif. Good morning, everyone, and welcome. With me are Bill Wagner, our Chief Financial Officer; Dave Sedgwick, our Vice President of Operations; Mark Lamb, our Director of Investments; and Eric Gillis, our Director of Asset Management.

Overall, 2017 was CareTrust's best year ever. We posted a record $310 million in new acquisitions. We increased our dividend again while still carrying an industry-leading 60% payout ratio. We tapped both the equity and debt markets with robust activity in our ATM and a new $300 million 8-year bond issue, finishing the year with a 4.6x debt-to-EBITDA ratio. And notwithstanding a couple of tenant issues, we still met our normalized FFO guidance of $1.16 for the year. All told, it was a great year and we're well positioned for a solid 2018.

With respect to the tenant issues I had mentioned, I'd like to update you on one of our tenants, Pristine. You'll recall, that in Q4, they agreed to transition 7 of our 16 Ohio properties to Trillium, another one of our operators. The transfer of the 7 buildings on December 1 went very smoothly. This reduced our exposure to Pristine from then over 15% of revenue to less than 7% of year-end run rate revenue. Trillium reported that the 7-building portfolio was not only profitable for December, but they posted an approximately 30% climb in monthly EBITDAR over the November same-store results. Since the transfer, Pristine has continued to provide exemplary patient care in the 9 retained assets. But the financial struggles have also persisted, with legacy debt to manage and other changes in their cost structure needed to address the things that caused some of their problems in the first place. In the process, they've discovered that it's much more difficult to shrink than it is to grow, and this has hampered their recovery efforts. As a result, they have only been able to partially meet their post-transfer lease obligations, and we have accordingly placed them on a cash basis and recorded the reserve against their deferred rent and certain other obligations to us. And also, as a result, they have now signed an agreement to transition the remaining 9 facilities to other operators selected by us just as they transitioned the last 7 to Trillium.

We have taken the 9 properties to market and are pleased to report strong interest. We already have multiple term sheets in hand from qualified operators to take over the buildings, and we expect to complete those transitions in the coming months. None of those discussions contemplates a reduction in our rental income from the 9 properties, and we do not anticipate any interruption of rents during the transition period.

Pristine, for their part, is not going out of business. They will continue to operate the 9 assets through transition, and they've indicated they will focus on their non-CareTrust operations following the transfers. We and Pristine agree that an orderly transition of these 9 assets' new operators is in the best interest of all stakeholders, including the staff and patients there. And although we have taken the reserve, we still have a security interest in their accounts receivable to protect us, and we are working with Pristine and their working capital lender to preserve and maximize value there.

As you can imagine, our experience with Pristine has required us to develop some new skill sets and have broadened others. We have taken full advantage of the situation to sharpen our underwriting, build and battle test a unique set of new asset management capabilities and reduce our tenant concentration risks. With these changes, no tenant besides Ensign represents more than 9% of revenues, which was not true 6 months ago.

We have also demonstrated our commitment and ability to address difficulties when they occur and on those rare occasions, to bring you transparency and solid solutions not just problems. As always, 2017 presented other obstacles for us to overcome, but the challenges we've worked through with Pristine have been the only real cloud on an otherwise banner year. And a resolution for that one is on the horizon, suggesting a bright 2018 ahead.

We'd like to talk about that now. Dave will address our operator relationships, then Mark will provide details on our growth and pipeline, and Bill will conclude with the financials. Dave?

Right. So I want to start by saying that our outlook is more positive than ever. It's hard not to be enthusiastic when you see improving coverage on average across the board and our largest operator, The Ensign Group, posts such impressive results in particular, again showing that success in the SNF business is less about macro factors and more about the capabilities of individual operators.

During a year when many outside observers predicted regulatory headwinds would be insurmountable, Ensign actually grew its market share in many of the same-store markets and grew its portfolio coverage with us from 2.1x at the start of the year to 2.17x at year-end.

Our upbeat outlook is bolstered by our recent progress in resolving a couple of tenant issues. As Greg described, our new lease termination agreement with Pristine will allow us to move the rest of the Ohio portfolio to other operators, and the assets we have already moved are doing very well under their new management. In addition, in December we transitioned 4 small senior housing facilities in Florida from our former tenant, Better Senior Living, and placed them with our existing tenant, Priority Life Care. These facilities account for just over 1% of run rate revenues. Better Senior experienced some operational trouble and fell behind in their rent in Q3. And while we were willing to work with them to the extent that the challenges were entirely hurricane-related, our asset management team saw deeper problems and we decided to replace them quickly. Since December, Priority has been doing an excellent job of getting the operations back on track.

We also continue to keep a close watch on our 2 OnPointe facilities, which together account for $2.5 million in rental revenue. Remember, we bought those buildings on a pre-stabilized basis at a deep discount as both were recently built and in lease-up. The affected facility has hit its stride and is performing at the level that we anticipated when we bought it. The Albuquerque building is still working toward full stabilization, but based on our visit to the building last week, we believe that the operation is on track and will be fine. We're also closely monitoring global issues at OnPointe that are unrelated to our specific assets to be sure that they don't spill over into our properties. If they do, we have contingency plans in place.

With these 2 exceptions, our operators are stronger than they've ever been. We have been taking all we've learned and continually strengthening our operator vetting process. Our new operator scorecard is the most rigorous underwriting tool we've ever seen and is exposing opportunities and highlighting strengths in our core current and prospective operators in a way that allows us to proactively address issues and vet operator candidates.

We continue to focus on the smaller local, regional operators whose assets are manageable and core to their business, and we maintain a discipline to say no to the hundreds of deals we see each year that would really be growth for growth sake. In addition to building on the many successes we've had and especially on learning from the challenges, we remain positive about the health care market. As we head into our company's fourth year, we're a stronger organization across the board. Instead of starting the year with one, we have 18 operators and our relatively small size still allows us to move the needle.

And speaking of moving the needle, Mark will now discuss the acquisitions market and our pipeline. Mark?

Thanks, Dave and hello everyone. Q4 was a great ending to a record-breaking year for us. We invested $153 million in new assets across 5 transactions, including a mortgage loan all at a blended yield of just under 9%, inclusive of transaction costs. For the full year 2017, we invested $310 million at a blended rate of 9.05%.

Turning to the new deal front. Deal volume is down from this time last year, where we have seen increased activity over the past few weeks. And based on conversations with brokers and intermediaries, we expect to see overall volume increase over the coming weeks and months.

In spite of a slow start, we have seen compelling opportunities for us and our operators that range from stable to non-stable and even distressed facilities that we view as great long-term investments that we can acquire at low occupancy cost to our operators, with significant upside in occupancy, new mix and coverage. Deal-sizing is still predominantly one-offs in small to midsize portfolios and as most of you are aware, some of our REIT peers are shedding nonstrategic to nonperforming assets. We believe there will be opportunities to reposition buildings with new operators in specific geographically concentrated markets, where our operators have scale and strategy advantages.

As we sit here today, our pipeline is currently in the $75 million to $100 million range. The current pipeline includes both on- and off-market skilled nursing and senior housing yields that we intend to pair with existing and new tenants as we look to build upon our full tenet of outstanding operating partners in new as well as existing geographic locations. Please remember that when we quote our pipe, we only quote deals that we are actively pursuing, which lead to yield and coverage underwriting standards we have in place from time to time and then only if we have a reasonable level of confidence that we can lock them up and close them.

Like 2017, we believe 2018 will bring great acquisition opportunities for us and our operators as we continue to apply our strategy of acquiring facilities and pairing them with strong operators.

And now I'll hand it over to Bill to discuss the financials.

Thanks, Mark. For the quarter, we are pleased to report that normalized FFO grew by 38% over the prior year quarter to $23.6 million, and normalized FAD grew by 36% to $24.5 million. Normalized FFO per share grew by 11% over the prior year quarter to $0.31, and normalized FAD per share grew by 10% to $0.32. Given our most recent dividend of $0.185 per share, this equates to a payout ratio of 60% on FFO and 58% on FAD, which again represents one of the best covered dividends in the health care REIT sector.

Before I go on, let me walk you through the $10.4 million charge we took in the fourth quarter relating to Pristine. As Greg discussed, we have entered into a lease termination agreement with Pristine. As a result, we have concluded that we are not likely to collect on prior amounts owed to us by Pristine as well as cash that we have or will advance for property and other taxes that relate to 2017. So the $10.4 million is made up of the cash advance for taxes at 12/31 of $6.3 million and deferred rent of $0.8 million and $3.3 million of cash that has or is expected to be paid in 2018 relating to 2017 taxes. We are only recognizing revenue based on cash received from Pristine for rent, and under the lease termination agreement, we expect to receive all scheduled contractual cash rents from Pristine through the transition period.

In our guidance for 2018, we are assuming cash rents after the transition to stay roughly the same as Pristine's current rents, and we are basing this on signed term sheets that we have received or expect to receive shortly.

In yesterday's press release, we announced our 2018 annual guidance for normalized FFO per share of $1.25 to $1.27 and for FAD per share of $1.31 to $1.33. This guidance includes all investments made to date, a weighted average share count of 75.9 million shares and also relies on the following assumptions. One, no additional investments nor any further debt or equity issuances this year. Two, CPI rent escalations of 2%. Our total rental revenues for the year, again including only acquisitions made to date, are projected at approximately $135 million and includes approximately $1.2 million of straight-line rent. Again, we have assumed, and expect, that the existing cash rents for Pristine will be paid during the transition and after the transition, cash rents will be the same or better. Three, our 3 independent living facilities are projected to do about $500,000 in NOI this year. Four, interest income of approximately $1.1 million. Five, interest expense of approximately $28.3 million. In our calculations, we have assumed a LIBOR rate of 1.75%. That, plus the current grid-based LIBOR margin rates of 185 bps on the revolver and 205 bps on the 7-year term loan make up the floating rates on our revolver and term loan. Interest expense also includes roughly $2 million of amortization of deferred financing fees. And sixth, we are projecting G&A of approximately $12.2 million to $13.4 million. Our G&A projection also includes roughly $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 4.6x, leverage is about 35% of enterprise value and our fixed charge coverage ratio is approximately 4.7x. We also have $10 million of cash on hand.

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

Thanks, Bill. Just a closing note, despite the challenges with both Pristine and Better Senior, we are not ready to concede to the occasional tenant failure as inevitable. We're still functioning on the premise that we can and should get operator selection right 100% of the time. It's a high standard, but while we're built for success with our extensive operational backgrounds, with that same perspective, we are also well equipped to mitigate the occasional unexpected failure. And we hope our willingness to address issues swiftly and decisively this past year has demonstrated to you our unique ability to preserve asset value in difficult circumstances. We will keep you posted on the Pristine transitions, and we'll be out on the road extensively in the coming weeks to answer questions and discuss the many good things that have happened and will be happening as we put this challenge behind us and continue to execute on our business plans. As an organization, we're stronger than we've ever been in all the ways that count and we're looking forward to an outstanding 2018.

We hope this discussion has been helpful. We thank you again for your continued support. And with that, we'll be happy to answer questions now and at any time you'd like. Latif?

(Operator Instructions) Our first question comes from the line of Jordan Sadler of KeyBanc.

So I just wanted to touch base on Pristine for a second here. What happened that caused things to deteriorate so quickly from the time that you recast the lease in November, that we're moving to this stage? And I'm just kind of curious to understand the process and maybe give us some context for why you didn't just do this, all of this, in November and why it had to be sort of -- why there's a second iteration today.

Yes. Fair questions, Jordan, this is Greg. Listen, the lifeline they were given under the fourth amendment, the one that we did in November, was actually real and doable. The projections looked good. We certainly would stand behind them, even today. But they required a clear level of fiscal discipline and urgency that frankly Pristine was not quite able to muster. As I mentioned in my prepared comments, it's a lot easier to grow than it is to shrink, and they just didn't shrink fast or well. And so the overhead that they were carrying, which we felt was excessive even for 16 facilities, needed to be paired immediately and it wasn't. Those weren't the only challenges that they experienced. Their cash flows are obviously somewhat lumpy. They were carrying a significant load of legacy debt and dealing with a lot of vendors that they thought they could hold at bay while they worked through this and did to a certain degree. But they were also always, it seems, pretty maxed out on their working capital line, and that working capital line shrank very quickly following the transition of the 7 assets. And it kind of was a zillion little things, call it a death by a thousand cuts, in a lot of ways. In the meantime, they took good care of the operations. They seem to have done a great job clinically, which they've always been very conscientious about. But the answers for their financial struggles just weren't there. Why did we not do it all at once back in November? Look, this was -- these were both negotiated exits. They felt like they could do the 9 buildings, where they haven't been able to do the 16 as successfully as everybody wanted them to. They -- and as I mentioned, the plan that they presented for the 9 was feasible. It just depended on the execution and the gap between the projection, which was realistic and the execution was -- ended up being more significant than you would want. If you looked at the 7 that they were giving up, those 7 accounted for, by their account, 75% of their losses in the year leading up to the December 1 transition. So everything looked fairly good with the 9 as we were crafting that deal and as they were insisting they could do it. Would I like to have done this in one fell swoop last fall? Absolutely. But again, it was a negotiated exit and it allowed us to preserve a lot of value that might otherwise have been threatened if we had gone to war and endured things like bankruptcies and all the cost and time and operational deterioration that, that often entails. We were still able to retain and preserve the asset value by doing this in one step with another chance and then in a second step when the handwriting was on the wall. I hope that answers the question.

Yes, that pretty much captures it. What was the nature of the $2.3 million of additional payments required under the lease that they did not make? That was obviously not base rent, but those payments were required as a function of what?

Yes. Those -- since it's a triple net lease, Jordan, those additional $2.3 million represents property taxes and other taxes that they're required to pay under that triple net lease.

Okay. That they were supposed to be impounding?

Well, under the fourth amendment we stopped impounding, so they're required to pay.

And there were some that we impounded in December of 2017 before that stop, and they did pay those. I think those also included some bed taxes, the franchise permit fees that are referenced in there.

Property and other taxes.

So when you see property and other taxes in our filings, Jordan, the lion's share of that is really the Ohio Medicaid bed taxes that have to be paid on a quarterly basis.

Okay. The other question I have was just on Better Senior. What was the rent concession to the new tenant, which I think was Priority?

Yes. Under the -- if we look at it on a combined basis, last year versus this year, we have about $3.6 million in rental revenue in our guidance this year versus $3.8 million that we would have had last year had they been paying contractual cash rents last year. Remember, Better Senior did not pay any cash rents in Q3 nor did they pay any cash rents in October, November. Priority took over 12/1 and we started recognizing revenue for all of those facilities beginning that.

Our next question comes from the line of Chad Vanacore of Stifel.

So I'm just kind of staying with Pristine for a second. In the 9 properties that are being transferred, so my math is right, contractual rent is currently $9.1 million, and you don't expect a haircut for the new operators?

That's correct.

Okay. And then what kind of coverage level on EBITDA or in EBITDAR coverage, what do you expect when the new operators come in?

With the new operators coming in at the rents we're discussing, we expect them to start off somewhere right around 1.3 as an initial going-in coverage on these assets.

All right. And then when you're thinking about why you pulled the trigger so fast, was the problem the operations deteriorating at the facility level? Or was the problem really more on the management side?

It was clearly more on the management side. The assets, the operations in the facilities, I think as we mentioned in our press release yesterday, were able to meet their current obligations. It's just the old legacy debt and the cash flow problems and other things that they have at the management level that's really hampered their ability to do what they might otherwise have done. But the operations and the assets are in pretty solid shape in our view.

All right. And one question not related to Pristine but maybe to your other operations that are transferring on the senior housing side. Overall, your senior housing portfolio occupancy has dropped pretty substantially. So what's your outlook for that portfolio as far as occupancy in 2018?

This is Eric. And we feel very comfortable about the occupancy going forward. We've worked with several of our tenants that were in a lease-up phase, and so we have several buildings in the Minneapolis area that are on the level of 90% to 100% occupancy now as opposed to a lease-up there that had about 50% occupancy. So we're seeing some of those numbers that are coming up quite a bit. So we feel pretty confident then that these numbers will continue to go up, especially with the Florida portfolio, with Better Senior transitioning it over to Priority. We've already seen some increase in occupancies with the handover to Priority. So we feel pretty good about that.

Eric, what are you seeing more on the stabilized portfolio rather than the lease-up portfolio?

Well, if you look at stabilized portfolio and again, with Florida, that has gone up. We've also seen some in the Midwest. Our portfolio has gone up as well with another operator in Premier. And so again, we feel comfortable with we have worked with. I spent quite a bit of time out in the field with our senior housing operators, and we've seen some steady increases over the last quarter. So we feel like going into 2018 that they're set up for some good success.

Our next question comes from the line of Jonathan Hughes of Raymond James.

And also, thanks for the color on Pristine earlier. I'm glad to hear it sounds like discussions to find new tenants are going well there. But is it safe to say that you'll be taking a step back from the kind of big deals, $100 million-plus portfolio deals, like Pristine was in 2015 and do more of the bread-and-butter smaller bolt-ons added to an existing operator's platform?

Yes, it's a fair question Jonathan, but my answer would be not necessarily. Every deal has to stand or fall on its own. We underwrite 300 to 400 deals a year and maybe make offers on 30 to 40 of them. So we're already being very, very selective about what we do. And big or small, if a deal's a good deal, it's a good deal. And what constitutes a good deal is assets, they're well located, well taken care of and available at the right price, that can be paired with an operator, first and foremost, who knows how to operate them and successfully in the markets that they're in. So if we find one of those, we don't care if it's $5 million or $50 million or $150 million. We will likely do that deal. And if you look at our acquisition patterns historically, for us to hit in the $300 million range, as we've done in the past couple of years, it takes one or 2 of those chunkier deals to get there even though we still very much love the bread-and-butter deals because we get them frequently at the right price and we grow incrementally with our existing operators that we love. And so I mean, it's all good. We're not turning away any opportunity based solely on the size, and we don't think that the challenges that we've experienced with Pristine really have anything to do with the size of that transaction.

Okay. And I guess that kind of leads into the next question. But I mean, in your expectations for external growth this year, how do you -- I know you don't give formal guidance there, but how do you plan to fund any growth if the equity markets don't provide you an accommodative cost of capital and maybe where's pricing shaking out on any deals you're seeing?

Yes. Remember, we've only been around for not even quite 4 years and the capital markets were not that accommodative to us even as recently as 2 years ago. So we kind of know how to work in a market that's -- it's a little bit hostile, if that's what this is. I don't think that's what this is. But we just continue to do what we do, we still spread investors, we're still looking at deals in terms of how accretive they are. Our cost of capital would fluctuate from time to time. It's obviously gone up in this market, partly probably due to the challenges we've had with Pristine that we're now solving, but also partly just to do macro issues for all the REITs. And so we're all taking those challenges in stride, we'll adjust as needed, and we will go out and continue to plan accretive deals and do our very best to match-fund our debt and equity usage to those deals so that we create shareholder value. It's what we do.

Okay. And then any, just, update on pricing? Has that moved up recently on deals you're seeing out there?

Hey Jonathan, it's Mark. It's really somewhat of a mixed bag out there. I think you have states like California and Florida, Virginia and Maryland that continue to -- they're as hot today as they've ever been. I think you have some pressure maybe in the Midwest with kind of tertiary, secondary markets, where you've seen pricing come down. But from a SNF perspective, there's still a lot of private money chasing skilled nursing assets. So occasionally, you'll see, on a distressed or non-stable basis, you'll see maybe the bid-to-ask spread kind of narrow. But for the most part it's still -- the SNF businesses, there's not a lot from a volume perspective on the market. So the buildings that are out there, they're getting a lot of interest and so we haven't seen pricing come down drastically, but we probably expect it to over, maybe over the short term. But it's still kind of early to say in the year.

Okay. And then one more, maybe for Dave. Are there any other properties that are on the watchlist that weren't mentioned in the prepared remarks or any that are underperforming relative to your underwriting expectations?

No I mean, I think we've been really transparent in sharing kind of ahead of schedule some of the things that we're monitoring closely right now with -- that I did in my prepared remarks. I think that like covers the world that as we sit today of what we're paying -- spending more attention on. So I don't know if Eric has anything to add to that.

Well, I think that we have seen some really good growth in a lot of our SNF operators. It's exciting to see a lot of these guys are increasing their coverage and we've been onto the buildings a lot over the last quarter to last a happy year and are really excited with the growth with these operators and excited to grow with them. I feel like we've got a really good stable group of operators that we're working with now and that we just like to continue to grow with.

Our next question comes from the line of Michael Carroll of RBC Capital Markets.

Greg, can you provide some color on the total portfolio's coverage ratios? Maybe what is the coverage ratio if we exclude the Ensign lease from that calculation?

Michael, we have not published that number, but if you take out Ensign at 2.17x, 44% of our revenue, I think you could get there.

Okay. And then, I guess, how should we think about those portfolios outside of Ensign? I mean, where has -- where they distributed through the I guess, through the cap or through the coverage ranges? I mean, is there anything that's below 1.2x? And how should we think about that?

I'm going to let Eric answer that question.

Well from the skilled nursing side, we're seeing a lot of increases actually in our portfolio, especially over the last quarter. So I'll take, for example, Cascadia Healthcare, which is a great partner of ours in the Idaho market. Their coverage continues to increase. And we have others that are along those same lines. We have a great operator in Southern Illinois by the name of WLC, and their coverage continues to increase as well. And we've tacked on some facilities to their portfolio because of the great coverage that they have. And so we're really starting to see a lot of these skilled nursing facilities that with all the negative press and everything out there this last year, we're actually seeing, with the exceptions that Dave talked about, our skilled nursing coverage is doing a great job and staying stronger or increasing in some aspects.

Okay. What's the portfolio skill mix today and what was it 12 months ago?

Again, that's not a number that we have calculated and disclosed. Eric, do you want to provide some color around the skilled mix though in the buildings?

Are you talking about skilled mix in the buildings or skilled mix of our portfolio?

Well, within the buildings and how have they trended. And that's what's been under pressure recently in the market as you're seeing reductions in the Medicare length of stays. Does that impact your portfolio? I know CareTrust has typically bought lower skill mix buildings, with the plan of having the operators bring in more Medicare patients and seeing some profitability improvements that way. Has that underwriting kind of worked out? Has the skilled mix trended higher within your portfolio whilst it's probably turning lower throughout the industry in general?

Okay. Yes. Question understood. So I would say that we have some buildings that we brought on this year that where they were, what we would call, kind of a distressed asset, so to say, that the operator has been able to come in and increase that skilled coverage or increase the skilled mix. I've been up in Washington visiting our portfolio there, and we're seeing some increases in the skilled mix that they have there as well as a lot of our skilled operators on the west. So I would say that we've seen an increase in some of that skilled mix new buildings. We still feel like that the Medicaid business has been stable and strong, and our operators continue to focus on that. But they can -- we've seen some ticks up -- some uptick on skilled as well and a lot of our portfolio.

And Mike, this is Greg, I just want to tack onto that. And just basically, what we do talk about, operators who want to move their skilled mix up, and that's a great strategy and it was great for us at Ensign and has been -- is good for other operators, there's also a great strategy in just running straight Medicaid shops. And we have some operators that do that and do that very successfully. So just to be clear, in those places where Medicare and other managed care skilled patients are the strategy, we feel like tenants are doing very well. We don't have any concerns about anyone out there on that front. But not everybody is pursuing that same strategy. There's other ways to make a buck.

Our next question comes from the line of Daniel Bernstein of Capital Securities.

I guess the question I have is, revolves more around, how do you think about how much of your portfolio is in some form of turnaround or operational upside and maybe turnaround is not quite the right word for some of the assets. But from an investment strategy, it seems like you're heading more towards buying some more assets that have this operational upside or lease-up need. And so I'm just trying to understand how much risk -- how do you think about the risk within your portfolio from a turnaround operational standpoint? And how much do you want to take on in future acquisitions?

Yes. Thanks, Dan, this is Greg. Listen, Mark talked briefly about the attractiveness of some of the distressed asset turnarounds that we do see out there in the market and success that some of our operators have experienced. Also, some of the assets that we have acquired on a pre-stabilized basis, they're not necessarily turnarounds, they're just new, where you get a great asset at a great price, you put in a great operator and it performs and we've seen that in our portfolio. Even though we've talked about that, we don't want you to think that that's primary strategy. We're still looking for stabilized assets, with stabilized operators running stabilized operations. Probably less than 10% of our portfolio is somewhere where -- is not where we are, probably where -- we're lower than that, but it's where our tolerance level would be for those kinds of assets, which can be very nice additions to a portfolio like ours with the kind of oversight that we can provide.

When you buy those assets, how do you pick up that operational upside within your income? Is there rent resets down the road? Do you -- is it just given a maybe slower lease bump so the lease coverage pops up and it looks better on your -- on this overall coverage? I'm just trying to understand how -- is the benefit just on the extra yield you might get on the investment, or are you picking up some additional income down the road as well when you structure those type of investments?

We might pick up a little extra yield on some of those kinds of assets, but we're really not looking to participate heavily or even at all in the upside of those. Understand that, that operator, who's stepping into a pre-stabilized asset, is also taking a risk with us. And the advantage for them stepping into that is they can fix their occupancy cost at a fairly low rate with miles, CPI-based escalators over a long period of time. And they're entitled some reward for that risk. So we're just happy to get the coverage that comes as they do that work, and that's where our focus really is. Our upside, our reward is in enhanced lease coverage down the road.

Okay. Okay. And maybe some additional yield upfront, right? The other question I had was going back to the acquisition pipeline. I mean, if you're seeing a lot of private equity or competing out there, have you thought about stepping back at all from the level of acquisitions that you've done in prior years? Or is that just not -- that you're still seeing enough deals that -- in the range that you can make it accretive, that you want to continue at the same level? I'm not asking for guidance, but -- per se, but just a general view and -- most REITs this past quarter have looked at their stock price and publicly said we're pulling back, and you guys have a very different tone. So I'm just trying to understand how you're looking at the acquisition market relative to past years.

Hey Dan, it's Mark. I would say, as we look at the opportunities that are out there, we discussed volumes were down, and last year, we underwrote 460 transactions. So pairing assets that make sense for our operators strategically, I mean, it's not -- you're not going to get -- you're not going to hit on even single-digit percentages of those types of assets that kind of fit the box. So we're out looking for opportunities that, as Greg said, can grow our lease coverage with our tenants. And so I think that's where we've steadily been $75 million to $100 million over the past 2 years. Our strategy hasn't changed. And we continue to refine our underwriting, and as we add new operators, we continue to look for those onesies, twosies. And occasionally, if a bigger, chunkier deal comes along that fits our underwriting, we'll do that. But our strategy hasn't changed. Volumes are down, so that just means we got to work a little bit harder and dig a little further to find opportunities. But I think, overall, I think we should be fine in 2018. I think the opportunity should be there.

Our next question comes from the line of John Kim of BMO Capital Markets.

I apologize if I missed this and if you've discussed it already, but can you just elaborate on the improved performance of the assets that were transferred from Pristine to Trillium?

Yes. Thanks for the question. This is Eric. We've seen about a, from November to December, a 30% increase in their EBITDAR from the same shops. So we've seen Trillium come in, and that was even before a lot of the managed care contracts were in line. And so now we're seeing it. It took a toll about February, the 1st of February, where they got all the contracts in line so they could start accepting more patients. And so largely, that was done with the 30% increase in cost control. And so the census was -- stayed about the same, but now we're seeing that in February, because they have the opportunities to accept managed care patients, which is a great population in Ohio, we can see even more buildup from a revenue perspective. So Trillium has done a great job. We expect them to continue to increase and excited about the future with those 7 buildings that they took on.

Yes. Hey John, this is Greg. I'll just add on anecdotally to that. As we have been discussing the exit with Pristine, naturally, we felt like Trillium, with the great job that they've done, the great relationship that we have with them and their willingness to step into those 7 buildings on relatively short notice during the holidays, that we owe them the chance to take a look at the -- at one or more of the 9 that are coming down the road. So we showed them one that is a very nice building, that operationally covers at about 2x, and asked if they would like to step into that and their answer was absolutely enlightening. They said, you know, we love the building, we'd like to do it at some point, but right now, we're very focused on what we've got and we're not going to grow again until we know that we have digested the acquisitions that we've taken. That is exactly the kind of answer you want to hear from one of your tenants. And with the answer that they gave, we're really, really just as pleased as can be with that kind of discipline in the portfolio. We hope we'll be able to grow with them further at a future date as they're ready to do that. But this is why they're performing well in the assets right now, and the proof's in the pudding, they're doing great out of the gate.

But that improved EBITDAR performance. Was what comparing Trillium since they took over versus Pristine right before they handed it off? Or is that just an improvement since they've taken over the operations?

No, that was the sequential results from November to December. And as Eric pointed out, they were kind of working with one arm tied behind their back because they didn't have -- it took a while for the managed care contracts to come through so that they could admit patients and it always takes a while to make the adjustments you need to make as you go through one of those transitions.

And then as far as transferring the remaining assets, are you saying Trillium is potentially on the table, or is it really off the table until they've absorbed the property?

Trillium has indicated that they are not a candidate for those, but we have several other excellent candidates, some who are in Ohio now, others who are -- would be coming to Ohio, all of whom are highly qualified operators of significant heft and who are very, very interested. And we already have, as we mentioned, a couple of term sheets in hand for some or all of those assets.

Okay. And now with the Pristine announcement, are you open to using your ATM again because I think that was the reason why you didn't use it in the third quarter? I was just wondering if that was the reason for the fourth quarter as well.

Yes, I'm not sure we like the stock price right now, but the -- all the news that people need to know really is out as far as we know. And so we wouldn't have any qualms about trading on the ATM if we felt like a -- we had a need and the market was there. As I mentioned earlier, we're very, very careful about being sure we match fund raises to our growth, and so we will be watching that closely.

And then the final one for me. Can you just remind us on Page 6 of your supplement to current yield how that is calculated, more so on the numerator part, is it a cash number or a GAAP number?

It's a cash number.

Okay. So the Pristine would have been reflected in this? Were these part of the original assets that were transferred? I'm just asking about the crunch of the client, they went from 10.2 to 9.8 in that.

Pristine would have been in the -- the new cash flows. It's cash yield based on their going in -- its going-in cash yield. So the rent adjustment that we gave Pristine last year is not reflected in the 2015 investment line item when we originally did that transaction. John, just to add on to that one, you can see what the current rents are and the investment that we made in those properties on Slide 8 of the supplemental.

Our next question comes from the line of Jordan Sadler of KeyBanc.

I just wanted to come back regarding the Pristine payments that were not made, not to harp on it, but were those payments reflective of -- to the current obligations or prior obligations. In other words, they made -- they had $4.9 million of base rent obligations since you recast the lease, but they failed to repay $2.3 million of obligations under the rent. I'm trying to understand if they were unable to pay 30% of their obligations or 32% of their obligations since those leases were recast or if some portion of that $2.3 million was from prior periods.

Yes. So the -- Bill, go ahead.

The $2.3 million that you're referring to, let me just pull my notes at least, the $2.3 million relates to 2017 obligations under the lease. So like property taxes that are paid in arrears for the prior period. Does that make sense?

Okay. Yes, it does. I mean, I guess, then the 2 are comparable, it would seem, assuming those would have been obligations that were reflective of the fourth quarter or reflective of November, December, January what have you. What I'm getting at is that it's a very significant miss in terms of the ability to pay that, right? They're behind on -- they're not meeting their obligations. They're missing their obligations by a factor of 32%. And so what I'm trying to understand is when we get to the 1Q report or the 2Q report, how do we -- how are we supposed to have conviction that the underwriting that you guys are anticipating for or that you've done surrounding these properties, that they've -- the new potential operator or tenant will be able to meet these? Why did they miss that badly? Or what is driving that big of a miss?

Okay. So let's -- on the $2.3 million, approximately $1.3 million relates to bed taxes that are owed for Q4, payable in Q1 of 2018. $1 million of the $2.3 million relates to property taxes for all of 2017. When we get to EBITDAR performance from the properties, they include -- they're on an accrual basis. So there's a property tax accrual every month for bed taxes and property taxes. Those EBITDARs generally, last year, for Pristine, were -- showed debt income. The problem that Pristine ran into during 2017 is the cash collections that came in were not sufficient enough that when bills came due like they are to pay those bills. Their bad debt expense for last year was...

Recorded at 2%.

Was recorded at 2%, but their actual bad debt was more like 6%. So that gap of 4% on, let's say they had $100 million of revenues, that's $4 million. That missed cash collection can pay a lot of these types of bills. So we think, going forward, with an operator that is, call it, more disciplined around cash collections and focuses -- has better processes and procedures around it will produce a better result on cash collections and have a lower bad debt expense. We benchmarked Pristine against another tenant in Ohio and their bad debt expense was less than 1%. So we know it can be done, it just wasn't done during 2017 by Pristine.

Nor was it done -- this is Greg, Jordan, nor was it done post the fourth amendment last fall. If it had been done and they were in the process of doing it, it was just very slow and it was very lumpy. If they had done it, I don't think we would be having any of these conversations about them now. But their inability to move that -- they were moving it very nicely in October and November, making progress on it, but they sort of hit a wall in January and that's where they've been stuck.

Okay. That's helpful. One other question is just leverage, Bill. What's sort of the appetite? I know, 4.6x, I feel like you're at. You're right there within the range for where you'd normally like to be. So what is the appetite to lever up incrementally in the near term in order to continue to sort of close deals and sort of execute on the acquisition front?

Yes. Our stated range is 4 to 5x on a debt-to-EBITDA. When we came out, Jordan, we were well above that, so we're comfortable managing the debt down from high levels. We've also been below 4. Last year, we were in -- we had a 3 handle on the debt-to-EBITDA. So we want to play between 4x and 5x. But depending upon investment flow and how deals hit, we'll kind of guide where that -- where the leverage goes. So I guess what I'm saying is if we have $40 million, $50 million in deals over the next couple of months, we're likely to put them on the line over the short term and maybe use the ATM to, call it, match-fund the portion of it.

At this time, I'd like to turn the call back over to Mr. Stapley for any closing remarks. Sir?

Thanks Latif, and thank you everybody for being on the call. As I mentioned earlier, we're happy to answer any more questions that you have. You know where to find us, and we'll be out on the road here in the next few weeks and hope to see you then. Take care.

Thank you, sir. Ladies and gentlemen, this concludes this conference. Thank you for your participation, and have a wonderful day.