CareTrust REIT, Inc. (CTRE) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the CareTrust REIT fourth-quarter 2014 Earnings Conference Call At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] as a reminder this conference is being recorded. I will now turn the call over to your host, Mark Lamb, Director of Investments for CareTrust. Please go ahead.

Thank you, Stephanie. Welcome everyone and thank you for joining us today. With me are Greg Staphely our chairman and CEO, Bill Wagner our Chief Financial Officer and by phone Dave Sedgwick our VP of operations; each of whom will be providing commentary today. We filed our 10K for 2014 and a company press release yesterday, both can be accessed on the investor relations section of our Web site at www.caretrustreit.com. A replay of this call also will be available there until 5 PM, Pacific, on Friday, March 13, 2015. As a reminder, any forward-looking statements made in today's comments or in the question-and-answer session are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financings and other matters; all of which are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied on the call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion on factors that could impact our results, as well as any financial or other statistical information required by SEC regulation G. Again our Web site can be accessed at www.caretrustreit.com In addition we supplemented our GAAP reporting with non-GAAP metrics such as EBITDA, adjusted EBITDA, FFO, normalized FFO, FAD and normalized FAD, when viewed together with our GAAP results we believe that these measures can provide a more complete understanding of our business but they should not be relied upon to the exclusion of GAAP reports. A reconciliation of net income to non-GAAP financial measures is available in yesterday's press release. Except as required by federal securities laws, CareTrust and its affiliates do not undertake to publicly update or revise any forward-looking statements or changes arise as a result of new information, future events, changing circumstances or for any other reasons. And with that I would cut the call over to Greg

Thanks Mark and good morning everyone. As you've seen we broke out and began to hit out stride in Q4. After [indiscernible] in last June, and a whole lot of posts spin activity to tie off the many-many loose ends, I can't tell you how glad we were to finally be able to settle into our long-term business plan. In the quarter we successfully closed on a number of deals but more importantly we [indiscernible] new operator relationships that we're pretty excited about. We also put a couple of more deals under contract with more steel and what's becoming a pretty interesting pipeline for 2015. The risk adjusted returns on the deals we did where solid and demonstrate the power inherent in our by operators-for operators personal approach to healthcare real estate finance. And by the way the new rents generated by the closings today where financed entirely from cash on hand and thus generating no new interest expense allowing the resulting revenues to grow up almost entirely with the bottom line. Mark and Dave will review these acquisitions in just a minute, but all in all and although it was a short year for us, 2014 gave CareTrust a really nice start. And we're excited to report that we are already on the scoreboard in 2015. So, even though we are pleased with how the year ended, we're actually glad to have 2014 behind us and we are looking forward to 2015 that is shaping up through the pretty exciting year. Before we discuss the future, I would like built to provide some color on the Q4 and partial year financials, and then Mark and Dave will add some details on our recent growth in pipeline. Bill?

Thanks Greg, and thanks to everyone on the call for your time and interest in CareTrust. As discussed on our previous earnings call or filings today have included the historical results of the combined properties the pre-spin version of CareTrust that you'll see referenced in our filings which are based on the old pre-spin in our company leases. Those intercompany rents as well as our capital structure change significantly at the spinoff so we don't view those historical numbers as being terribly helpful to a discussion today. For the quarter we recognized 14 million in rental revenue from our leases with Ensign and 139,000 from your investments. For 2015 we expect to recognize 56 million from the Ensign portfolio and 3.8 million for the all the investments that we have closed post spin including the most recent $18 million investment in 2015 for total rental revenue at 59.8 million. We expect interest and other income of 900,000 in 2015 resulting from the 7.5 million for equity investment at 12% that we made in December. The three independent living facilities that we own and operate generated 663,000 of revenues for the quarter and had corresponding expenses of 559,000 resulting in NOI of 104,000. We expect 2015 NOI of approximately 300,000 from these three facilities. Interest expense was 5.9 million in the quarter and includes 553,000 amortization of deferred financing lease. We expect interest expense to be approximately 24 million in 2015. This assumes no draws on our currently undrawn $150 million revolver. The position expense of $5.4 million in the fourth quarter and we expect 2015 depreciation of approximately 22 million including the latest acquisitions. Rounding out the expense side of the equation is G&A. In the fourth quarter we recognized 2.3 million of expense, up from 800,000 in Q3. This was largely due to a 1.2 million in [indiscernible] in Q4 which was approximately the midpoint of the range I quoted on last quarter's call. Remember, the incentive amount was largely dependent on the amount of investments that we made in 2014 posts spin, and with our late start on the year those investments did not show up to late in Q4. The remaining increase was due to the amortization of previously announced Q4 stock rents totaling a 154,000. We expect G&A to be approximately 6.2 million to 6.9 million in 2015. This range includes a cash incentive similar to 2014, accrued randomly over the year and almost $1 million in amortization of stock comp related to the December 2014 grants. But it does not include any new incentive grants that might be made hereafter. This all increased to net income of 630,000 and FFO of 6 million for the fourth quarter. Normalized FFO was point 2 million after adding back 200,000 off process associated with the spin and some acquisition costs. That was 6.7 after adding back 700,000 of amortization of deferred financing and stock cost to FFO. Normalized FAD was then 6.9 million after taking into account the same spin and acquisition cost. Beginning 2015, or diluted weighted average share count is approximately 31.5 million shares, up 9 million shares after the special dividend. For 2015 we expect FFO per share to be between $0.96 and $0.98 and FAD per share to be between $0.06 and $0.08. Our leases contain CPI based escalators, but Ensign leases have no escalators this first year and rents under our new leases won't increase until the anniversary date which is late in 2015. [indiscernible] escalators include fixed bumps, so none are straight line, this results in us having a higher FAD number than FFO. Turning now to the balance sheet. We ended the year with 25 million in cash, down from 89 million at September 30 due to a 33 million of 9.23% average yielding investments that we made during the quarter and the 33 million that we paidout in the special dividend. A recent 18 million, 9.65% yielding investment lowered our cash balance further. Our remaining cash plus the 84 million currently available under our underarm secured credit facility gives us ample room to grow. Further our recent investments are expected to add approximately 30 million in additional liquidity. In December we declared a 12.5 cent dividend. This equated to a 50% payout ratio on Q3's normalized FAD, after adjusting Q3 share counts to include the special dividend shares. And utilizing this dividend, it equates to a payout ratio of approximately 47% on the low-end and 46% on the high end of 2015 FAD guidance. We feel that as a young growing company, every dollar that we can deploy into higher-yielding investments will over time create greater shareholder value on returns versus distributing that cash in the form of dividends today. That said, we are continuously monitoring our dividend yield and as we grow into a more stabilized recurring cost structure, I would expect our dividend policy to evolve and our dividend to grow. And lastly, for those of you that may not have heard the news, the Ensign group sold 2.5 million shares of common stock at $41 per share and we used the proceeds from the offering to repay debt and for general corporate purposes. The receipt of these proceeds only strengthens the already sterling credit quality of our principal tenant. And if I failed to mention, for the 12 months ending, September 30, 2014, the Ensign leases now cover a 1.91times up from 1.85 times after the spin. And with that I'll turn it over to Dave and Mark to discuss the portfolio and the pipeline.

Thanks Bill, and hello everyone. This is Dave Sedgwick. As Greg mentioned in Q4 we finally started seeing the fruits of our labors with some outstanding operators signing up to partner with CareTrust. In each case we see significant opportunities on the horizon, and in some cases we have already secured contractual commitments from them to work with us to grow their businesses as we grow ours. As you know we seek to partner primarily with small and midsize operators who are fully engaged in their businesses and looking to grow. Most of these operators are locally-based and focused and they do not attend the national conferences or regularly interface with mainstream brokers and bankers. So we are going after them, market by market, looking for best in class local and regional operators with whom we can grow our respective businesses together. The deal we did with 20-Twenty management is a good example, the 20 team has long wanted to grow their business of assisted living and senior housing, but lacked a solid capital partner. Constrained by a perceived lack of capital availability, it's been the weigh opportunity after opportunity to grow in their Western Virginia markets. We now own one of their buildings which we acquired on a sale-lease back in December, and have a second building under contract. The proceeds of these transactions will enable them to capture more of the opportunities around them and we expect that we will be able to repeat the sale-lease of that process with them over and over as they go. Another example of the deal we did with Cross Healthcare, and Idaho-based assisted living operator. We did a sale-lease back on three of their best properties and the proceeds allowed them to rationalize and consolidate their ownership structure so they can grow more efficiently. We also secured options on their next three projects and we expect to have them shortly looking at a couple of opportunities that we have sourced for which they might be a great fit. The Pralude [ph] deal brings us another quality operator with whom we can grow over time. Pralude is an outstanding Minnesota-based memory care operator which has developed a unique and much-needed high equity memory care model. We bought Pralude's flagship building in Q4 and secured an option to buy their next building which is currently under construction upon stabilization. Pralude has planned to build approximately 9 more of these proven buildings and is using the proceeds of this first sale-lease back to fund and fill his next project. We expected as we buy each successive projects, Pralude will continue to roll the proceeds forward into the next, a tremendous recipe for growth for both of us. We continue to reach out to the operator community which is responding tremendously well to our bioperators, foroperators approach to finance in healthcare real estate. And looking at these operators we are much more focused on the quality of the operator and operations and our backgrounds operators makes us well qualified to evaluate them, their business plans and prospects and to do so accurately. We're connecting with more such operators every week and we anticipate that we will be able to continue to diversify the tenant base in a meaningful way this year. Already the deals we've done in just the past three months, at first our principal tenant [indiscernible] down from 100% of tenant revenue to approximately 88% on a run-rate basis. And we expect that percentage will continue to improve. All in all we feel great about the volume of opportunities we're seeing from a variety of sources and the skilled assisted and independent living spaces that we know well that we're pleased to be focused across those specific areas at present. With that I'll hand it to Mark to talk about our recent deals and the current pipeline. Mark?

Thanks, Dave and hello everyone. As Bill mentioned, we closed 33.3 million of new acquisitions in Q4 and have closed another $18 million since. These deals have contributed over 4.8 million in run rate revenue and represent a blended average yield of 9.23%. As you know our strategy is to string together a steady stream of relatively small deals to produce big results over time, neither acquisitions fit that strategy perfectly. More important than the growth itself is the solid, risk adjusted returns on these one-off deals illustrates the power inherent in our business model. Dave mentioned a couple of the operators, let me tell you about the properties in the investments. In November, we did the three building assisted living sale lease pack with Cross Healthcare in Idaho. The $12 million cross deal included 90 AL in memory care units, carries an initial cash yield of 8.5% on EBITDAR or lease coverage of 1.31 x coverage and produces initial annual lease revenue of just over a million. Their average age is only eight years and are 92% occupied. The agreements also include rights for CareTrust acquires three additional cross assets in the future. In December, we acquired at Woodbury, an upscale memory care facility in Woodbury, Minnesota, a Minneapolis suburb, for $7.2 million. The transaction was a sale-leaseback with Prelude Homes & Services, LLC, which developed and opened the 30-bed facility in 2011. The Woodbury investment carries an initial cash yield of 8.25% on EBITDAR lease coverage of 1.30x, producing initial annual lease revenue of $0.6 million. CareTrust also secured an option to purchase and lease back Prelude's next senior housing project, which is currently under development in nearby White Bear Lake, Minnesota. In December, we also completed a $7.5 million preferred equity investment with signature senior living in milestone retirement communities. The investment is being used to develop Signature Senior Living at Arvada, a 134 unit upscale assisted living and memory care community in the Denver Metro area, which is currently under construction. Our investment delivers a 12% annual preferred return and includes an option to purchase the community at a fixed formula price upon stabilization with an initial lease yield of at least 8%. Also in December, we acquired English Meadows at Christiansburg, a 39 unit assisted living facility in Christiansburg Virginia for 6.6 million on a sale lease pack with Twenty/20 management. The English Meadows investment provides an initial cash yield of 8.5% on EBITDAR lease coverage of 130 producing initial annual lease revenue of 0.56 million. Contemporaneously with English Meadows transaction, CareTrust also entered into an agreement with Twenty/20affiliates to purchase and lease back Twenty/20 recently acquired Elk’s National Home, a 169 unit independent in assisted living campus located in Bedford Virginia when it is stabilized. Finally in January, we also closed on Bethany Rehab Center a 170 beds skilled nursing facility in Lakewood Colorado for 17.95 million in conjunction with the purchase characterized entered into a triple-net lease with Eduro Healthcare, a small but well regarded Utah based skilled nursing and home health operator which took over operations effective February 1st, 2015. The Bethany Investment provides an initial cash yield of 9.65% on EBITDAR lease coverage of 1.3 producing initial annual lease revenue of 1.7 million. Also, we have deployed approximately 51 million since the spinoff and at present we have competitive term sheet out on multiple opportunities that are collectively represented over 350 million in proposed transactions. Needless to say, we are very excited about the pipeline and opportunities coming from all quarters of the industry. For the record as we speak to you today, CareTrust has 103 properties in 12 states with 8,545 skilled beds, 1,704 assisted living units and 477 independent living units in operation. We are actively working with a variety of brokers, sellers and operators to source compelling opportunities to extend the CareTrust footprint nationwide. And we have additional acquisition growth and diversification prospects in the pipeline. With that I'll hand it back to Greg.

Thanks, Mark. Before we conclude, if you saw our press release yesterday you know that we issued guidance for 2015. Based upon the existing portfolio today for 2015 we expect approximately 63.3 million revenues with approximately 24 million in interest expense and 6.2-6.9 million in G&A. We're also projecting $0.96 and $0.98 in normalized FFO, a $6 to $8 in normalized FAD and $0.26 to $0.28 of net income all on a pre-diluted common share basis. These projections are based on diluted weighted average common shares outstanding of approximately 31.5 million. No additional acquisitions or dispositions beyond those made and announced to date and exclusion of any future stock based compensation. To wrap up, we're pleased with our start and looking forward to a great 2015. We have a solid and growing rent stream and enviable portfolio with a true best in class tenant who is about to get even more solid and abundant opportunities to grow. We've got deals in the pipe and best of all great operators gravitate into the CareTrust story. We hope this discussion's been helpful. We want to thank our shareholders again for your confidence and especially your patience as we navigated our way through the many [indiscernible] that mark 2014. We look forward to a great 2015 and with that we'll be happy to answer questions. Stephanie?

[Operator Instructions] our first question comes from Chad Vanacore with Stifel. Your line is open.

Good morning. So can you give us an idea what the pipeline now looks like, you said it's about -- you're reviewing over 350 million of investment. Can you give us what type of asset and geography?

It ranges across the country. And it ranges across the senior housing as well as skilled nursing space. We're seeing a lot up in the North West, we're seeing a lot in Middle America and it really is across all the property types. Memory Care -- obviously their conversation, where the acquisition on Prelude has opened up doors for those small operators who may be historically didn't think that a small 28 unit, 30 bed facility is something that we would look at. So we've gotten a couple of opportunities to size up and have great conversations with operators who have little bit smaller of a model, but are very-very effective in operating their businesses.

Chad, we also -- when we look -- think about our pipeline we kind of think about of this as two separate pipes. One is sort of our core business strategy pipe which is the small one off deals, it's small portfolios that we've been talking about and doing. And then we are also, in their pitching on a couple of larger portfolios, we're not as competitive on those as some of the competitions. So we don't tend to focus at tremendous amount of time and energy on those, but we do have a couple of deals as we've mentioned already under contract. One of those we just gone hard on, our diligence is complete we're just waiting for the license, it should have come through. We don't know if that one will close in this quarter or next, but the deals that we're really focused on are the small deals, these 9 and 10 and $20 million deals.

Thanks a lot, Greg. You just answered my next question about there is competitive deals for larger operators. Do you have any commentary about who those deals are going to. Are they going to may be some larger reeds or more private equity investment?

Non trades, it has been very competitive out there. We are seeing them on some of the deals that we've chased. Obviously we have some direct competitors who are closer to our size and stage development. We're not out chasing the half billion dollar deals have been tossed and Healthcare [indiscernible] would be chasing. That's just outside the realm of our capabilities, but we think we can call together really good year just by focusing on the nuts and bolts kind a small deals that we're finding a lot of success with.

So far the patterns has been some smaller senior housing deals and then may be a little bit larger on the skilled nursing. Should we expect that going forward or just all over the place?

I think you got to expect it all over the place. I mean, we’re just taking the best risk adjusted returns we can find right now and all they mean, if you had asked me you know six months ago, are your force fast forward deals going to be non-sniff deals, I would have said that's crazy. Because we've been sniff guys and we're really comfortable in the sniff space, but as it turned out we got four really nice seniors housing deals right out of the gate and then deal number five was a good solid sniff. So, I can't -- we can't predict exactly what’s going to come down in the pipe. We know what we're working on. I think at next yield that we close will be a sniff, but beyond that sky is the limit and we are wide open.

Alright, then just one more from me. So you've got right now about 84 million available on your 150 million revolver. How much more an asset value do you need to add to your portfolio in order to get full availability?

Well, I think I said Chad that we -- with our most recent acquisitions, we'll take it up to approximately 110 million. So to get the remaining 40 million available under the line we probably need to do about 60 more million assuming the investments go in about 65% of purchase price.

Alright. Thanks for your time.

Thank you.

[Operator Instructions] Our next question comes from Dunkin Brown with Wells Fargo. Your line is open.

Hey everyone. May be come back to the Greg two pipeline commentary of the 350 million number that you guys put in the press releases. Can you break out what percentage of that is sort of what you all referred to as core business and is there is a chunk of it that sort of larger deals as well?

Yes. You know we haven't gone through that exercise. Dunkin it's a fair question, but you have to sort of divide the pipes. We don't have two distinct seats where we kind a keep everybody A on the scoreboard. So I'm not sure I can do that one for you.

That’s fair. I was just curious -- may be then go back to the geography, questions asked earlier, get out of a different way. Most of the things you’re looking at in the pipeline, are they -- can you give us a flavor for what percentage is -- sort of outside existing Ensign states or is it just again all over the map?

It’s a lot of it's outside of -- Ensign -- Ensign in about 12 or 13 states right now. We're now about 12 states right now. Thinking about the 350 that we've quoted I would say just very-very rough, Dunkin. Just to give you a ballpark, I would say that about 60-65% of it's probably outside that footprint.

Okay. That’s helpful. And then I wonder if you could may be give us an update obviously the separation feels largely complete between the two companies. Are there any sort of still shared services, back office legal anything -- legal issues for the two companies are still -- still sharing or is it just a complete separation between Ensign and CareTrust now?

Hi Dunkin, it's Bill. We still are utilizing Ensign for some transition services mainly in the accounting area. We currently use their accounting system, as right now we are implementing a new financial system that we hope to go live in the next few months, but after that, that really should be a -- we don't really use any of their personnel per se to close our books___ we've hired people here to handle that, but really it's just a financial software system.

Okay. Thanks a lot.

Thank you.

I am showing no further questions I will now turn the call back over to management for closing remarks.

Well that's it. Thanks again everybody. We appreciate you being on and we look forward to talking to you again in about 90 days. Take care.