LTC Properties Inc (LTC) 2015 Q4 法說會逐字稿

Good day and welcome to the LTC Properties Inc. fourth-quarter 2015 analyst conference call. All participants will be in listen-only mode.

(Operator Instructions)

Before Management begins its presentation, please know that today's comments, including the question-and-answer session, may include forward-looking statements subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties are detailed in LTC Properties' filings with the Securities and Exchange Commission from time to time, including the Company's most recent 10-K dated December 31, 2015.

LTC undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date of this presentation. Please note this event is recorded.

I would now like to turn the conference over to Wendy Simpson, CEO and President. Ms. Simpson, please go ahead.

Thank you, Austin. Good morning and good afternoon, everyone, and thank you for joining us today.

The year 2015 was a significant year of growth for LTC. During the year, we underwrote a total of $414 million in transactions. Of that amount, $302 million represents accretive transactions at the time of closing the transactions, and $112 million was in new development investments and underwritten commitments that will be accretive upon completion.

At year end, we had remaining investment commitments of $89 million, most of which will be spent in 2016 and will become revenue producing during 2016 or the first quarter of 2017. Our investment profile at year end is 51.2% in skilled nursing assets and 41.3% in assisted living and memory care. All of the $41.6 million expended and classified as under development at year end is related to assisted living and memory care. As a result, we remain fairly balanced in our portfolio of skilled nursing assets and assets more closely identified with the private pay sector.

We expanded our line of credit to $600 million, expanded our relationship with AIG with $100 million senior unsecured debt shelf financing agreement, and established a $2 million ATM. Pam will discuss these activities more fully, but it is these actions plus successes in investments that made 2015 a growth year for LTC. And this growth allowed us to increase our monthly dividend from $0.17 a month to $0.18 per month beginning in October of 2015.

During the fourth quarter, National Health Investors, NHI, converted the LTC preferred shares they owned and received 2 million shares of LTC common stock. By holding the preferred, they were foregoing approximately $1 million in annual dividends, and I'm pleased that NHI made this decision. I believe Eric Mendelsohn, NHI's CEO, commented on their recent call that they've sold some of the shares and maintain over 1 million as of the date of his call.

This issuance of shares was not dilutive to us because they have been in our fully diluted numbers for quite awhile. But the conversion eliminates all preferred shares from our equity structure, and since preferred shares are viewed as debt, it decreases our debt and benefits our already conservative leveraging stats. Plus it adds 2 million shares to market capitalization and 2 million shares into circulation.

Subsequent to year end, we closed our first 2016 investment and purchased a new skilled nursing property in Texas for $16 million. During 2015 and already in 2016, we have done due diligence on larger transactions that were in the $90 million to over $200 million range, but have not been able to meet -- but they've not been able to meet all of our underwriting criteria or the assets might not fit our strategy of acquiring newer assets. While we're not stubbornly blind to a set of criteria, we just have not been able to get enough comfort that the acquisitions would be the right transactions at the right environment.

I'm pleased to welcome Doug Korey, Senior Vice President of Business Development, and Mandi Hogan, Director of Marketing, to our Company. They both joined us recently, and Clint will give you a summary of their backgrounds and how they will work with us in growing LTC in 2016 and beyond.

After comments from Pam Kessler, our EVP and CFO, and Clint Malin, our EVP & CIO, I will have closing comments and give guidance for the full year 2016. At this time, I'll turn the call over to Pam.

Thank you, Wendy. FFO increased 21.9% for the fourth quarter of 2015 to $27.8 million, or $0.74 on a fully diluted per share basis, from $22.8 million or $0.64 per fully diluted share a year ago.

Revenue for the quarter increased 21.6%, or $6.6 million year over year. The improvement primarily reflects acquisitions, completed development and capital improvement projects, new leases and lease amendments, as well as an increase in interest income from mortgage loans resulting from loan originations and the amendment to the Michigan loan, partially offset by a reduction in revenue from properties sold at the end of 2014 and mortgage loan payoffs. Fourth-quarter interest expense was $5.6 million, an increase of $1.9 million over the comparable 2014 quarter, due primarily to the sale of senior unsecured notes, greater utilization of our line of credit to fund investments and development, and lower capitalized interest.

During the fourth quarter of 2015, we recorded a $2.3 million impairment charge related to a 48 unit assisted living community that we agreed to sell subsequent to year end. We anticipate selling the property in the first quarter of 2016 for $1.8 million.

General and administrative expenses were $4 million, or $741,000 higher this quarter compared to a year ago, due to increased staffing and other costs associated with more investment activity. During the quarter, we recognized $276,000 in income from unconsolidated joint ventures and a $586,000 gain on sale of a 112-bed skilled nursing center located in Texas.

Turning to the balance sheet. During the quarter we purchased two skilled nursing centers with a total of 254 beds in Texas for $23 million, adding them to a master lease of senior care at an initial incremental cash yield of 8.25%. We also purchased a development site for $2.8 million and entered into a commitment to construct a 66-unit memory-care community in Glenview, Illinois. The full commitment totals $14.8 million, including the land, and the property was added to an existing master lease with an affiliate of Anthem at an incremental cash yield of 9% at certificate of occupancy.

During the fourth quarter, we purchased a 118-bed behavioral healthcare hospital in Las Vegas, Nevada for $9.3 million, and subsequent to year end we purchased a 126-bed skilled nursing center in Texas for $16 million. We added both of these investments to a master lease with an affiliate of Fundamental an incremental cash yield of 8.5%.

During the quarter, we originated a $20 million, 30-year mortgage loan secured by two skilled nursing properties in Michigan. The loan bears interest at 9.41% for five years, escalating 2.25% annually thereafter. To date we have funded $15 million under this loan commitment. The remaining $5 million commitment is available over the next three years for capital improvements.

We also originated a $2.9 million mezzanine loan which is recorded as a joint venture, to develop a senior housing community consisting of 99 independent assisted and memory-care units. Additionally, we invested $12.8 million in properties under development and capital improvement projects during the fourth quarter.

During the quarter, we repaid $45 million under our line of credit with proceeds from the sale of $100 million of senior unsecured notes to AIG. The notes bear interest at a 4.26%, have scheduled principal payments, a 10 year average life, and mature in 2028. As Wendy mentioned, we expanded our relationship with AIG earlier this year, with a $100 million debt shelf agreement under which these notes were sold.

During the quarter, we exercised the $200 million accordion feature of our line of credit, bringing total commitments under our line to $600 million. Also subsequent to December 31, we borrowed $32 million and therefore currently have borrowings of $152.5 million outstanding and $447.5 million available under our revolver.

Also, during the fourth quarter as Wendy mentioned, NHI converted all of their shares of our convertible Series C preferred stock into 2 million shares of our common stock. Therefore we no longer have any preferred stock outstanding. I'll now turn the call over to Clint.

Thank you, Pam. Good morning, everyone, and thank you for joining us today.

We are pleased to have competed our second transaction with Fundamental in the past four months. The behavioral healthcare hospital investment in Las Vegas is a great opportunity to invest in an asset class that has garnered our attention in a risk adjusted manner by adding the property to an existing master lease. The recent sale leaseback with Fundamental and a newly constructed 126 bed skilled nursing center located in the Dallas/Fort Worth metropolitan area, is another example of investing in new and modernized skilled nursing centers and growing our relationship with an experienced and highly capable management team.

On our last earnings call, I indicated that our active pipeline was $125 million. Since then we have completed $39 million of investments to acquire the three skilled nursing centers. Pam commented on the details of these transactions just a few minutes ago.

Currently we are working on approximately $100 million of off-market transactions consisting of acquisition and development opportunities of private pay assets, all sourced through existing partner relationships. These transactions are in various stages of negotiation, and I look forward to providing an update on these deals during our next earnings call.

We continue to be selective in pursuing development opportunities, which has been an important part of our investment strategy over the past five years. This strategy brought four new operating partners into our portfolio, continues to reduce the average age of our portfolio, and increases revenues derived from private pay sources.

We have been methodical and disciplined in our approach by selectively working with mainly growth oriented operating companies and adding projects into existing master leases to provide an additional credit enhancement. Although concerns of overbuilding is being talked about in the industry and undoubtedly occurring in some markets, lease-up at our private pay development projects has been strong and ahead of projections.

As of year end, we had an outstanding development commitment of approximately $90 million, which Wendy mentioned, in addition to expansion and renovations of existing properties. This outstanding commitment will add six new private pay communities to our portfolio, all added to existing master leases.

As Wendy mentioned in her remarks, recently we added Doug Korey and Mandi Hogan to our team. Doug comes to LTC with over 20 years of experience in the seniors housing and care space and is an NIC board member. Doug is a seasoned deal-making veteran, bringing an extensive client base with him. In this business development role, Doug will expand our capabilities to originate additional mezzanine and preferred equity investments and drive growth of sale leaseback investments.

Our goal is to methodically, strategically, and with a disciplined approach develop the relationships with an operator base that typically has not utilized refinancing by offering a product more familiar to them. As new relationships are cultivated, we hope sale leaseback opportunities will eventually surface, helping to grow our portfolio of assets.

Mandi has a diverse background in sales and marketing, and most recently was a Director of Marketing for NHI. Over the past three years at NHI, Mandi focused on building relationships with regionally-based operating companies mirroring our targeted customer base. Mandi will focus on elevating LTC's profile in the industry through strategic marketing campaigns, strengthening relationships with industry associations, and sourcing relationships with operating companies that we do not currently know.

Mark Hemingway, who will be retiring at the end of the month, will remain with the Company on a part-time basis to assist Mandi. Mark's ongoing involvement will allow LTC to continue drawing upon his years of experience and excellent reputation throughout the industry. The addition of Doug and Mandi to our team, along with Brent Chappell, our Senior VP of Investment and Portfolio Management, continues to grow a team of highly talented and experienced professionals who help drive future growth at LTC. The combination of the skilled team and attractive cost of capital positions LTC to be opportunistic in growing our portfolio.

Turning to our portfolio, for the same-store portfolio, the trailing 12-month period ended in the third quarter of 2015. EBITDAR leased coverage for skilled nursing is 2.27 times, assisted living 1.65 times, and range of care 1.75 times. EBITDAR coverage after an allocated management fee of 5% of revenues is 1.65 times for skilled nursing, 1.41 times for assisted living, and 1.28 for range of care.

Compared with the previous quarter, occupancy remains consistent across all property types. Occupancy for the trailing 12-month period ended in the third quarter of 2015 is as follows: Skilled nursing 79.5, assisted living 85.8, and the same for range of care at 85.8. Our quality mix for the portfolio remains strong with 51.5% of underlying revenue derived from private pay sources.

Coverage in our skilled nursing portfolio decreased 7 basis points from the previous quarter. 4 basis points of this change was attributable to annual rent increases under our leases, and increased interest income resulting from the additional $40 million of loan proceeds funded to Prestige Healthcare in June of 2015. EBITDAR coverage for the Prestige Healthcare portfolio, consisting primarily of skilled nursing centers located in Michigan, is very strong at approximately 2 times coverage for the trailing 12-month period ended in third quarter of 2015.

Coverage and occupancy metrics for our portfolio of 37 assisted living communities leased to Brookdale continues to be strong. For the trailing 12-month period ended in third quarter, EBITDAR coverage after an allocated 5% management fee of revenues is 1.82 times with occupancy of 88.4%.

Lastly, as I commented during our previous earnings call, in 2015 we began evaluating opportunities to recycle capital by selling assets no longer core to our portfolio. As Pam discussed, our first asset sale occurred at year end and other property is under contract.

I anticipate the sale of a handful of additional properties during 2016. Now I'll turn the call back to Wendy.

Thank you, Clint. Pam, would you comment again on our liquidity and our credit stats?

LTC is in the enviable position of having low leverage and ample liquidity to fund our current growth trajectory. We currently have $447.5 million of availability under our unsecured line of credit, and $37.5 million of unsecured debt availability under our Prudential shelf.

As Wendy mentioned, earlier this year we you put in place a $200 million at the market offering program. We currently have the entire amount available under the ATM.

At the end of the quarter, LTC's investment grade credit metrics remained one of the best in the healthcare REIT universe, with debt to annualized normalized EBITDA of 4.3 times, a normalized annualized fixed charge coverage ratio of 5.7 times, and a debt-to-enterprise value of 26%. Additionally, we have one of the most conservative debt maturity ladders in the entire REIT universe, with long-term debt maturities carefully matched to our free cash flow, thereby virtually eliminating any refinancing risk.

In utilizing debt to fund investments, we have prudently matched our long-lived assets with long-term debt with 10 to 15 year final maturities. We believe our conservative balance sheet management provides us with the best opportunistic approach to financing our Company's future growth and creating long-term shareholder value. I'll now turn the call back over to Wendy for closing remarks.

Thank you, Pam. While we do have a pipeline of $100 million, investment activity in general feels light. It is maddeningly difficult to predict sale leaseback opportunities at any point in time. Seller decisions happen for so many diverse reasons. I place a large value on our ability to have the liquidity and the experience and the team to react quickly and decisively as opportunities present themselves.

Again, 2015 was a strong year for growth and for shareholder return and stability. Our goal is to continue growth in 2016, and I look forward to talking to you next quarter about our opportunities.

At this time, I'm giving guidance for 2016 FFO of $2.95 to $2.99. This guidance is as always same store based on what we currently have as investments and assuming certain completion dates for development. It does not include new investments or underwritings, issuance of shares, or terming out any portion of our current outstanding line of credit. Thank you for dialing in, and I will now open the call to questions. Austin?

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Thank you and good afternoon. Was hoping that you could spend a couple seconds just giving us your take on the skilled nursing outlook today as you see it and what you're thinking as you're underwriting new potential investments.

We still have a lot of confidence in the skilled nursing sector. It has its challenges as it's always had its challenges. There's never been a year that I can think of that skilled nursing is an easy business to do.

We continue to focus on the regional operator, regional or local operator, who we think has more ability to respond to its current marketplace than maybe a national operator does. We're still underwriting at an 8.5% to 9% lease rate.

We think that the newer assets that can be added into a master lease still should be underwritten no less than 8.25% lease rate. There's challenges for the managed care, but our operator seems to be managing well to the changes in their environment.

Clint and I have a schedule where we're going to go out and talk to each one of our larger nursing home operators to just get a one-on-one feel of what they're looking for in 2016 and beyond. So we don't have any significant concerns for the business of the skilled nursing. I don't know, do you want to say anything, Clint?

I think a lot of the headwinds recently have been focused on the larger national operators. Some of those operators focus on and have higher than average Medicare censuses in their portfolio.

So obviously they're more impacted as a result of that. But in general, the change in reimbursement to more of a risk based value-add proposition, providers have been preparing for this and I think it's something that's not new. The industry is -- Wendy mentioned that it has always had challenges here and there, but it serves a purpose and we still think there's opportunities in the skilled nursing space.

Okay. That's helpful. So sounds like your underwriting has stayed somewhat consistent, and I guess I keyed in on one of your comments at the outlook, Wendy, on looking at $90 million to $200 million type acquisitions, but none are fitting into the criteria.

Can you elaborate there? Is there anything specifically that's not fitting? Is pricing just too aggressive, or is it somewhere on the risk side that's troubling?

Sometimes the pricing is aggressive, even though the cash flow might cover if the pricing is aggressive in terms of you looking at it on a comparative last sale in the -- a comparative sale in the same spate most recently, the age of the assets. We look at a large transaction like that between $90 million and $200 million, where would that place the operator in our strata of operators.

Would it be a significant operator that we would probably want to be very conservative of adding a number one operator that we hadn't had before by investing a lot of money into a transaction. So it's very hard to walk away from those opportunities, but I think our discipline has served us well in the past and while we have gritted our teeth, we're still sticking to our criteria.

And we also looked at a transaction where on the skilled side where through due diligence the penetration of managed care into this certain urban market had really -- the properties we were looking at had not yet been impacted by that penetration. But you could see in the market where it was stronger and there was the potential for downside on that.

We felt the initial pricing of the deal just didn't work based on the potential penetration of managed care and how that might impact those assets on a long-term basis. So it's something we definitely take into consideration in our due diligence process.

That's helpful. Just the last one on the dispositions, obviously you've got one done here and you're teeing up some incremental, I think you said a handful for 2016. What's the criteria and the nature of the decision to punt some of these?

It's a combination. One, looking at asset age, looking at markets, where they are located. And also looking at the operator relationship itself. If we don't have the ability to grow that relationship and we have a one-off asset in a rural market that's older, those are the type of opportunities that primarily have driven looking at recycling capital on assets in the portfolio.

Going to be more AL or more skilled?

Probably more skilled.

Thank you.

Thank you, Jordan.

Our next question comes from John Kim with BMO Capital Markets. Please go ahead.

Thank you. So on skilled nursing, the coverage declined in the third quarter. Do you have any views on how the fourth quarter is going to turn out?

Right now we obviously -- we look at current information and on an annualized basis as well and look at it on last quarter. It's hard to take smaller snapshots of the portfolio for less than a 12-month period.

So no glaring changes that we see. It's always going to ebb and flow a little bit, but nothing that stands out that's causing significant changes where like some of the headwinds you're hearing about, some of the large national providers.

Okay. Can you remind us when you get clarity on this? We're already two-thirds into the quarter. Are you still waiting for some of your operators to report to you?

We get those on a -- we have one quarter in arrears. So we've got to get that information. We've received -- in February started receiving some reports.

But it takes a while to go ahead and incorporate that into our model to flow it through and analyze it. We always report a quarter in arrears.

Okay. On your mortgage loan book, it's increased significantly over the past year. How large do you want this to be as part of your overall investments? I think now it's almost 16% of your total investments.

The primary driver on the mortgage side is our investments in Michigan, and those are skilled nursing assets. And structurally how reimbursement works in Michigan, it's challenging to do lease structures there.

We basically have done 30-year mortgages, which basically embody many elements of a lease. And that's really just more of a structuring item related to the state of Michigan.

In terms of loan loans like mezzanine loans or short-term bridge loans that we're looking at, I don't expect that we are going to go much over $50 million.

Okay. The provision that you had, the provision for doubtful accounts, can you just describe what the cash flow is of that loan? Is the borrower no longer current on the interest payment?

Sure. That is just a required provision upon loan origination. So GAAP requires that when you originate a loan you take an estimate of -- you make an estimate of the provision, and we use a 1%.

So every time we fund a loan or originate a loan, we take 1% of that balance and record the provision. And then as the loan amortizes it's amortized as revenue into that line item.

So it's just an accounting feature. There's no cash on it. There's no cash implication.

But the loan loss reserve, is that in relation to what you think you'll be repaid?

Is it in relation -- yes, it is an estimate based on the history of the Company, which is less than a 1% loss on our mortgage loans. So we use the 1% as an estimate.

I see. I got it. Okay. And then your guidance for the year, it basically suggests at the midpoint that there's no growth compared to the fourth quarter run rate.

And you do have some developments coming in line, but can you just remind us what the offset to the organic growth that you have is? I think the midpoint would suggest no growth to the fourth quarter.

I think it's just our conservative guidance. I hadn't taken the fourth quarter and annualized it. I just looked at the year. So I'm at a loss to explain what your calculation is.

Maybe can you just go through those assumptions one more time, please?

The assumptions of our 2016 is all of our assets that we have today, including the fourth quarter with any unusual things taken out of the fourth quarter, and adding in the development activities as we assume the development will be finished. And we've taken the low point is assuming a certain amount of asset sales that would happen the first quarter, because we had to put them in some quarter.

So it assumed all the asset sales that we have anticipated happen at the first quarter. So that would be taking out some revenue. It's unlikely because we sit here at February 22 and we don't have any of those sold yet, other than the one we reported on.

And you mentioned no acquisitions in your guidance, correct?

Correct, no acquisitions. And using the outside date for development completion and revenue recordation.

Okay. Thank you.

Thank you, John.

Our next question comes from Rich Anderson with Mizuho Securities. Please go ahead.

Thanks and good morning out there.

Good morning.

So did you give a dollar figure for the dispositions that you've got thinking about?

No. (Laughter)

So when you just told John that the low point of your guidance assumes asset sales in there, what's the number?

If you would take $0.01 a quarter, I think that would be reasonable. A reduction of FFO by $0.01 a quarter.

From dispositions?

Yes.

What were you going to say?

Our total dispositions, it's not a significant number and if things go like we think, we'll net out a capital gain.

Okay.

But we are foregoing some revenue.

Okay. Fair. So you mentioned some of the competitive pressures that haven't been able -- you haven't been able to cross the finish line on some deals. And specifically on skilled nursing you had a floor lease yield still 8.25%.

Is it because people, the buying public, is aggressive so there's a lot of money still chasing these assets? Or are you adjusting down the profitability of the underlying businesses because of Medicare bundling and so on and how that impacts the lease yield?

What are the driving forces that are making that 8.25% number tough to pencil? Is it on the buy side or on the operating side that are driving it down?

I think people are still over-pricing their assets. They haven't come down to a reasonable -- well, a reasonable price -- a price that we would be willing to buy at this time. So I think that's the biggest point.

Is it interesting to you that people are still willing to be aggressive, despite some of the question marks surrounding the business right at this juncture?

It doesn't seem to be coming from our brethren REITs, who seem to all have said that they're finding acquisitions difficult to do. It seems to be coming from the sellers who maybe are a little late to getting to the party.

I see.

So it's not that we're seeing an aggressive other buyer, though I think a couple of these deals may be getting done with other financing sources, I doubt a REIT. But there are other sources coming into the marketplace which might be private equity or something like that. Clint, you might have --

I agree. Listening to earnings calls this quarter, it sounds like, as Wendy mentioned, REITs are being disciplined and there has been a change in cost of capital, which I think obviously is affecting the appetite, at least from the REIT perspective. There is private equity that's still out there.

You have some money on the non-traded REIT side still to be deployed. There's a price discovery point or phase that's going on right now and trying to figure out where in the market pricing is on these transactions.

So I think sellers still have that expectation. It takes a little bit of time once the cost of capital changes happen, and so it's just a process through 2016 I think we end up working through. There still are opportunities that we see.

I think we believe we've got an advantage on a cost-of-capital basis right now to find assets that are newer, modernized, and pick the companies we want to partner with in growing our portfolio. So there's going be opportunity.

So you're seeing sellers are in some cases asking too much still?

Correct.

Okay. What is the average escalator in the portfolio today? And how much of it is fixed and how much of it is CPI based?

About 2.25%, 2.5%.

And most of it would be fixed.

Last question to you, Wendy I guess, but a lot of times when you issue guidance you have an optimistic undertone to the future. Assuming you complete some acquisitions and not that you come out and say it, but you get the sense that guidance is going to go up, at least that had been my read.

This time not so much. But is that my imagination, or do you feel like this range that you're giving today is maybe not as subject to lift because of some of the difficulties you're finding deploying capital in this marketplace?

Well, there are a couple of things, Rich. Pam was just saying before we took the call about how the debt markets are a little bit different right now than they have been for quite a long time. Even with the 10 year as low as it is, recent debt issuances that we would be compared to are fairly high, in the 6% or 7% range.

So I'm feeling that the debt markets aren't someplace that we would be comfortable using additional debt. And you know my conservatism relative to the balance sheet.

We have plenty of money on our line, and we have access to some money from our shelf still and the ATM. But stock prices have to be right for us to use the ATM.

So I'm a little bit cautious about all of these financial inputs in the market, from the debt markets, from the equity markets, and from our balance sheet. I don't want to step out in front of the debt markets.

If we had a really, really good opportunity in front of us to do a deal, I think we still have access to reasonably priced equity and we might use that opportunity, but right now I just don't see clarity in where we're going to go for this year. I hope we have things that happen and we can issue positive increases in our guidance, but I wouldn't say that right now.

Good color. Thank you very much.

Thank you, Rich.

Our next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.

Thanks. Clint, can you give us some additional details on the drop in the SNF coverage? I believe you indicated the drop related to I guess two things, rent increases and the draw down on the Prestige loan. Can you break out the impact of each one of those?

I had indicated that of the 7 basis point drop, 4 basis points attributable to just annual escalators in our leases that occurred, and then the funding of that $40 million of the additional loan proceeds with Prestige Healthcare on our Michigan loan portfolio. Of that 7-basis point change, 4 of it related to interest income and the rent escalator. So that's the primary driver of the change in coverage.

Okay. And then can you give us, what was the coverage of the Prestige loan before and after the additional draw down?

I said it was 2 times on the trailing basis. The before coverage -- Brent, do you have the before?

2.01 prior, and 1.98 after.

Okay. So it was -- they've driven some changes operationally that accounted for that. So it was similar because they've been ramping up a lot of operational opportunities.

And we do expect though going forward, that period only had a three-month inclusion of increased income. So as we go forward into the following quarters, you will see more impact on the rent side, but our anticipation is that they're going to drive operational efficiencies and increased revenues to offset that.

So we may see a little bit of moderation on that 2 times coverage, but we still expect it to be a very healthy coverage. Any time you're above 1.5 times in skilled nursing I think it's very, very strong coverage.

Okay. Can you give us an outlook of what you're thinking about on the senior housing development side? Is it more difficult to find new projects, given the pick up in construction activity? Or are you taking a step back in that, or are you still excited by it?

We're very cognizant of what's happening in the market. There is definitely talk about overbuilding in certain markets. One thing we definitely can see is that prices are increasing for labor and materials.

And there have been some projects that we've not been able to pencil because of increased costs. But at this point we are working with partners in our portfolio, being able to add new projects into master leases that act as credit enhancements, and I think the partners that we're working with, they're disciplined.

They're not trying to get ahead of themselves and grow too much. They're trying to grow a platform, and they have to live with these investments long term because it's not like we're partnering with them and we're looking to be opportunistic and sell the asset in four or five years.

We're going to own these properties for the long term, and our partners are going to lease them for at least 15 years. So we're being very disciplined and methodical about how we add in development projects.

At this point, we're probably not looking at bringing in a lot of new operating partners on the development side. There's always a possibility of something unique coming along, but we're really trying to grow out our existing relationships, and we think that really helps to add a credit enhancement to these development projects by adding more into the same master lease.

Great. Thank you.

Thank you.

Our next question comes from Paul Morgan with Canaccord. Please go ahead.

Hi, good morning. In terms of the pipeline that you're working on right now, and you mentioned that it seemed like it was off market assets with existing partners or opportunities for development as well. Do you think that should translate into a higher conversion rate for those deals than what you saw maybe over the last quarter in terms of the larger portfolios that didn't pan out?

Definitely increases the conversion rate. And these are -- they're smaller transactions, one or two properties. So although not guaranteed, but I think there's a fair likelihood that we will execute on a good portion of these.

Okay. Great. And then you've talked about how it's maybe difficult to pencil out deals right now in the market. What are your operator partners thinking about growth right now?

Do they still have the appetite and it's just a matter of finding product? Or are they maybe more conservative now and in the context of some of the industry challenges?

I think they definitely have the appetite, it's just finding the right opportunities. A great example of that was with the two skilled nursing facilities we bought with senior care centers.

They found an opportunity where there was truly a mom-and-pop operator and where that -- we were able to source this transaction, and this mom and pop didn't want to continue having to deal with increased reimbursement or dealing with basic managed care and how to interpret that. So a great way to grow our relationship with senior care through that. When companies can go ahead and add in properties to their existing footprint, that's a more secure environment, helps them offset some overhead on that as well.

Great. And then just lastly, maybe you could just talk a little bit of background about bringing Doug Korey on and targeting more mezz lending as part of your investments. Was that an opportunistic move, or is this something you've looked at over the past year or two and said we would like to do more here, have even a bigger platform in terms of the mezz part of what we do?

It's something that we've looked at for a couple of years now, and we have talked to Doug about doing this with other companies he's been employed with. So we've got a familiarity with him over the past couple of years, and looked at some opportunities together.

We just think it makes a lot of sense on a measured basis to go ahead and incorporate this as a product offering in the portfolio. Because really it goes to being able to work with operating companies and offer solutions, different types of capital.

And there is definitely a percentage of the operator population that has typically not used REIT financing because they like the idea of owning their assets. As those companies grow their organizations, sale leasebacks can be a very viable component of their capital structure.

Doesn't mean we have to own all the assets, it really just provides different options for these operating companies. If we can get into those organizations sooner and develop relationships, we're hopeful that we can cultivate those relationships and turn them into offering some sale leaseback financing over time.

And Wendy, did I hear you right, you thought that maybe this could be a $50 million annual business for you?

Yes, that's our internal projections of what we think. One of the good things or interesting things about Doug working with us is that hopefully the very, very few times a deal doesn't work out, we would be the lender who would be able to bring in a new operator.

Or we're not like a bank who would maybe flounder around a little if there was some sort of problem with the property. So his ability to underwrite and his connections in the industry that we don't have -- the part of the industry that we don't have deep connections with right now, along with our portfolio of operators who could assist us if anything happened, it just made a lot of sense to bring Doug onboard and we just had a unique opportunity that he was available.

Okay. Great. Thanks.

Thank you.

Our next question comes from Karin Ford with Mitsubishi UFJ. Please go ahead.

Hi. Good morning out there. Just wanted to follow up on Wendy your answer to Rich's question, just get your thoughts on leverage.

You mentioned as you said the conversion of the preferred brings your leverage down, but you are concerned about volatility on the capital markets side. Can you just give us an update on your thoughts as to where you think the right level of leverage is for the Company in 2016?

I continue to think that 30% debt to enterprise value is the high. If we did a transaction and went over that, you could anticipate that there would be an equity transaction pretty soon after that.

We continue to be able to borrow on a basis where we can fit our maturities into our cash flow, and that's very important for us to not look ahead and see a wall of debt coming due. So I still think 30% is an area that's most comfortable for our Company.

And you mentioned your reluctance to go into the debt market. Do you have additional availability under any of your current debt shelves with AIG or Pru?

Karin, this is Pam. We have $37.5 million available with Pru.

Okay. Great. And then just on the SNF portfolio in the coverage, is there a lot of variation around the 1.65 EBITDAR coverage? Do you have anything, say, below 1.4 times on that basis?

We have not decided to break out coverage by operator. And given that there is a range, we have Prestige which is up around two times, there are some buildings that are below 1.5 times.

So there is some diversity, but we haven't provided that detail other than a couple of portfolios where -- like Brookdale is an example where there's been questions in the market regarding what's happening. And then specific to -- we provided Prestige to provide some color on what happened from quarter over quarter. We've tried to keep very general by providing it for the portfolio as a whole.

But of our major operators, none of them are of concern.

Correct.

So there's been no precipitous drop in any major operator.

Correct.

That's helpful. My last question is just on the Slinger lease up. I think you mentioned last quarter that you were expecting a move to United Healthcare on November 1 to boost leasing velocity there.

I saw it picked up quarter over quarter. Can you just talk about your outlook, whether it's going to hit the stabilized 85% occupancy level before the two-year anniversary?

Talked to our fundamental about that recently, and they do have that contract in place. They're starting to see movement under that.

They have a big relationship in other markets with United. So as of right now we believe that will -- those will be achieved within the 24 month -- stabilization will be achieved within the 24-month period.

And then Corpus Christi, the rent inception just got delayed a quarter. Anything we should read into that at all?

No, nothing to read into.

Okay. Thank you.

Thank you, Karin.

Our next question comes from Chad Vanacore with Stifel. Please go ahead.

Good afternoon. Thinking about the size of your pipeline, you said about $100 million.

That seems to be down a bit from the $125 million we were talking about last quarter. Are you seeing a slowdown as a result of price dislocation that you alluded to, or cost of capital or something else?

We are seeing a little bit of a slowdown in volume of deals that we're seeing. That's both on skilled nursing and on the seniors housing sides.

I don't know if that -- it's not uncommon that in the first quarter you'll see activity not as strong as in other quarters. So could be possibly that, but just in general with price discovery going on right now we've seen some assets and portfolios that have come back on the market.

There obviously has been a question in the marketplace about pricing of those deals. That could be leading to it as well. So I think we'll probably have a better feel next quarter if it's truly just a first quarter impact or if we're seeing really just a slowdown in general because of cost of capital and price discovery continuing.

All right. So Clint, that feeds into my next question which has been you increased your capital availability. You exercised the accordion feature.

Why now? Why is the time now to do that?

Well, at a point it looked like we had more opportunity in the $90 million or $200 million. So we needed the ability to make those investments, and we don't want to send out a letter of intent with a financing contingency.

So at the point that we pulled on the accordion, it looked like we would be doing some large transactions. It does hurt to pay those fees to get the additional liquidity, but we would have needed it had we completed successfully the underwriting. So it was a chicken and an egg.

Thanks, Wendy. Given your comments on the debt market, would you be willing to let the revolver balance run longer than usual before terming it out?

Right now, yes. There seems to be significant dislocation between --

The volume on that line is low right now.

The rate on the line is low and we don't have a lot of acquisitions coming up on our horizon that we currently see. I think we've also seen some acquisitions where just preliminary information was the assets were much older, and we're not looking to add older -- a portfolio of older assets.

If there were older assets in a portfolio that had a balanced asset life, we wouldn't forego that. But if the portfolio predominantly has older assets, it's more difficult for us to go forward on a transaction.

All right. So then just thinking about best capital opportunities in 2016, how would you rank acquisitions, loans, development, and other?

I would say our best opportunities are with loans and then acquisitions. I think Doug is just getting his group together. He's got an analyst working with him.

He's understood, now understands LTC and what our strategy is, and he has an amazing group of people that he's done business with in the past. So I look forward to Doug bringing on some good short-term revenue, and we're totally open for acquisitions.

And I think our development is going to be a little lower than it has been in the last couple of years, but we're going to continue doing it with the operators that we've already underwritten. But that's how I feel the first opportunities we have. Now, next quarter it might be different than that.

All right. Well, thanks for all the color. Appreciate it.

Thank you, Chad.

(Operator Instructions)

Our next question comes from Todd Stender with Wells Fargo. Please go ahead.

This is for you, Clint. I know you don't provide coverages by operator. Just seeing if you'd consider opening that up some.

We certainly have the fixed charge coverage for Genesis at the parent Company level, but we get it from Welltower and HCP. I imagine they are in good shape in your portfolio, so it might shine through to investors better. Just wanted to get your updated thoughts there.

We can talk about it internally, Pam.

We can continue to talk about it. Allocation of resources.

We gave Brookdale.

We gave Brookdale. We gave Prestige.

We gave Prestige Healthcare.

I think Todd's asking for something more formal like a scatter plot like some of our peers do. Is that what you're asking, Todd?

Exactly.

A heat map? Yes. It's -- I mean you do a cost benefit analysis and as we said with the highest coverage amongst our peers, how much more benefit does -- (multiple speakers). Absent NHI. Because of the nature --

Give them their due.

Little shout-out there to our buddies at NHI. You do a cost benefit analysis internally and is it really providing that much more benefit versus the cost for a smaller cap REIT in internal resources to generate something like that quarter over quarter.

Got it.

We will continue to -- we take your comment to heart and we'll continue to evaluate that.

Okay. Thank you. And just looking at the recent investments, the behavioral healthcare hospital that you made -- that investment you made in the quarter, can we -- I don't know if I missed it.

Did you give the coverages, EBITDAR coverage on that? And then if you can give a little more color on the additional financial commitment you have with that?

We're doing a renovation project at that hospital with Fundamental. So the coverage on that should be -- we've underwritten it to be north of two times coverage on that project.

It's not fully -- it's operational now.

It's operational.

They haven't put in all the programs that they will put in by the time they get all of their --

Capital deployed.

Capital deployed. It's going to be awhile before we consider it operating at its normal operations. It's open and it's generating revenue and it's under Fundamental's master lease.

And they're paying rent on that?

Absolutely.

They are, yes indeed.

Okay, thank you. And at the SNF, any more color you can give on the SNF you have acquired already in Q1? Is that under the same master lease?

It's the same master lease. The property started operations in mid-2015. So it's leasing up strong and this is our third -- this is the third project that we've been involved with Fundamental.

This one on the acquisition that's been a brand new property. So they've done a great job in looking at opportunities, designing, developing, and leasing up properties, they have a lot of experience at.

So they have a presence in the -- obviously in Texas as well as in the Dallas/Fort Worth market. They've got strong relationships so we're excited about that opportunity with them. It's exciting to have newer modernized assets, continuing to include those into the portfolio.

What's the lease-up period on a property like that, and what market is it in?

It's in the Fort Worth market. We typically underwrite these up to 24 months on stabilization. Obviously we're anticipating it to lease up a lot sooner than that, but that's what we provide for in underwriting.

Thanks, Clint. Pam, if I could just finish with you. Based on Wendy's comments, sounds like maybe the spreads are widening in the debt markets.

Can we hear your current thoughts on the debt market? And then I know your preferred is now gone, but is the preferred market open to you? Is that an increasing probability this year?

No, the preferred market I think the rates are just too high in the preferred market. And we've always been very opportunistic in terming out our line with debt, and we'll continue to be and we're watching the markets right now.

Like I said, we have $37.5 million available with Prue, and should spreads compress in as the 10-year remains low then it's a possibility. It's just right now what's happened in the past couple weeks with spreads and the general volatility in the debt markets it's not an opportunistic time to term out debt.

Okay. Thanks, Pam.

You're welcome.

This concludes our question-and-answer session. I would like to turn the conference back over to Wendy Simpson for any closing remarks.

Thank you, Austin, and thank you all for dialing in and participating. And if we don't see you before our first quarter call, I look forward to talking to you then. Have a great day. Bye.

The conference has now concluded. Thank you for you attending today's presentation. You may now disconnect.