CareTrust REIT, Inc. (CTRE) Q4 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to CareTrust REIT Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a 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 may be recorded. I would now to turn the conference over to your host, Ms. Lauren Beale, CareTrust Controller. Ma'am, you may begin.

Thank you. Welcome to CareTrust REIT's Q4 and fiscal year 2018 earnings call. Please note that this 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's business and the environment in which it operates. These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financings, and other matters, all of which are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied 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 other statistical information required by SEC Regulation G. During the call, the company will reference non-GAAP metrics such as EBITDA, FFO and FAD, and normalized EBITDA, FFO and FAD. When viewed together with its GAAP results, the company believes these measures can provide a more complete understanding of its business, but cautions that 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, changing circumstances, or for any other reason. Listeners are also advised that CareTrust, yesterday, filed its Form 10-Q and accompanying press release, and its quarterly financial supplement, each of which can be accessed on the Investor Relations section of CareTrust's Web site at www.caretrustreit.com. A replay of this call will also be available on the Web site for a limited period. Management on the call this morning include Bill Wagner, Chief Financial Officer; Dave Sedgwick, Chief Operating Officer; Mark Lamb, Chief Investment Officer; and Eric Gillis, Director of Asset Management. I will now turn the call over to Greg Stapley, CareTrust REIT's Chairman and CEO.

Thanks, Lauren. Good morning and welcome everybody. 2018 started as a somewhat difficult year for us here at CareTrust, but we're pleased to be reporting that we finished the year with FFO per share of $1.28, which was in line with both consensus and our guidance, and a net debt to EBITDA year-end at an all-time low of 3.3 times. It was actually really a little bit better than that. Had we left our aftermarket program in the barn during the second-half and avoided the dilution we took, we still could've posted a net debt to EBITDA well below the low end of our target range of four to five times. However, as the year wore on, we saw on the horizon both clouds and opportunity which are frequently, as you know, the same thing. And so with eminent deals in the pipe and a constructive view for 2019, we deemed it prudent to reduce debt and increase liquidity. As most of you know, our fundraising philosophy, whether off the ATM or through secondaries, is to do our best to match lender equity raises as closely as possible to our capital deployments. Using the ATM allows us to raise equity capital at a fraction of the cost that a secondary would carry, and we could turn it off and on based on our sense of the market and our view of our pipeline at any time. Q4 demand, in particular, for our equity was robust. And through the quarter and since, we've raised $98 million off the ATM. This matched up nicely in amount, although not perfectly in timing with the $100 million in new investments we've made, since October 1st. Although these last couple of announced deals closed later than expected and were thus unable to contribute to 2018 earnings, we believe that the accretion they represent going forward was well worth the short-term deceleration in our FFO per share growth. So, we're happy with where we've been, and even more excited about where we're going. We've closed on $53 million in new assets already in 2019. And as the 8-K we filed at the end of January illustrates, we stand on the cusp of another new growth opportunity which, if we can get it successfully closed, would surpass in size anything we've done to date. And after those investments, we've still have plenty of dry powder. We've just expanded and extended our revolving credit facility, moved maturity on another $200 million of our debt out to seven years, and we're still seeing substantial interest in our equity. We have $22 million of cash on hand, and our conservative payout ratio will give us another $30 million to $40 million in retained cash that we can redeploy in the remainder of this year. This matters immensely as we contemplate a real estate cycle which by some accounts, and we're not taking a side or making any predictions here, but some might say it might be getting just a little bit long in the tooth. So we're ready for whatever opportunities may arise, and we plan to carefully manage our assets and the balance sheet to remain ready as the cycle plays out over the next couple of years. With that, I'd like to turn some time over to the team to fill you in on the details. Dave will talk a little bit about our current assets and operators, then Mark will discuss recent acquisitions and opportunities, then Bill will wrap up the financials. Dave?

Thanks, Greg, and good morning. Now, our strategy has never been to grow for growth sake, and 2018 was the year where the value of that discipline was proven. As Greg mentioned, there were plenty of opportunities to overpay, instead we held our ground and used the lull to position ourselves for better acquisitions in the future. And they have begun to come, but I'll let market talk about that pipeline in a minute. As usual, let me update you on changes in the portfolio, starting with our newest new operator. Tennessee-based Providence Health Group joined us in Q4 through a single asset acquisition in West Virginia. Providence is owned and led by respected and skilled nursing veteran, Doug Cox. Doug has assembled a great team of operational, financial, and clinical talent to operate 10 facilities in the middle of the country. The first couple of months in our new asset have been terrific. We are now looking to add facilities to their master lease. In other parts of the portfolio, we've seen our operators make some tremendous strides, particularly in some of the, we'll call them, pre-stabilized assets we acquired in late 2017. Give you a couple of example, Cascadia Healthcare, based in Idaho, took over several Kindred and [indiscernible] buildings. Adding those facilities immediately took their master lease coverage down to levels that in any other setting would be uncomfortable for both landlord and tenant. However, turning around non-stabilized facilities is something they know well, and for which they have a proven track record, and it's something we're intimately familiar with as well as former turnaround operators ourselves. So we didn't panic when we saw the expected dip in coverage, which often happens during the first six to 18 months of a turnaround or repositioning, depending on the size and complexity of the job. We're really impressed with the solid work that Cascadia has done. If you ask them, they'll say they still have a lot left to accomplish, but they're overall trailing three annualized coverage today is back up to about 1.8 times. Another example is Texas and Louisiana based PMG. It had a similar experience as they tackled the three Texas Kindred facilities we acquired for them in Q4 of 2017. Predictably, the first several months produced choppy results as they absorb the new acquisitions and incorporated their operating model into them. They were also carrying out significant projects in all three. Part of our deal with them included us funding the CapEx for a strategic repositioning of these assets which impacted operations as well. So, they've had their fair share of headwinds as they work to stabilize the buildings. Nevertheless, looking at the trailing four annualized numbers, as of November, their lease coverage in those buildings is now approaching three times, and they're still not quite done with the last three models. Just a sampling of what great operators can do with good pre-stabilized opportunities. And we're pleased to be associated with these two great operators and several others, both in our portfolio and waiting in the wings. So we're staying firmly focused on our operator-first model, and we are continuing to look for more and better ways to evaluate, monitor, educate, and support our tenants and their operations. As I previewed on the last earnings call, effective January 1, we've added the qualitative data from PointRight to our operator scorecards. This qualitative facility and market data is further strengthening our underwriting and asset management processes. Perhaps more importantly, our contract with PointRight allows us to give their data to our smaller tenants who would otherwise be unable to afford it themselves, so they can use it to make smarter and more timely management decisions, improve operations, and enhance their ability to compete in a narrowing network environment. Finally, looking at the broader skilled nursing industry, the landscape remains stable with no major changes from last quarter. Our operating experience, our operators and the stable reimbursement environment, and the coming new PDPM reimbursement model combined to inform our positive outlook on this sector. Even during this lull, before the long-rumored [indiscernible] surge starts to make an impact. And with that, I'll hand it over to Mark to talk about the pipeline. Mark?

Thanks, Dave, and hello everyone. In Q4, we closed approximately $31 million in investments, acquiring three skilled nursing facilities. In the process, we added, as Dave mentioned, a great new tenant in Providence Health Group, and tacked on a facility apiece to our existing master leases with Metron and Eduro. We also invested $4.4 million in revenue enhancing CapEx into the portfolio. These acquisitions brought our total investments for 2018 to $116.4 million. Just a note about underwriting, although $116 million is a pretty light year by our standards, we're not unhappy with the result, since it reflects the discipline that we believe is critical for our long-term health and success. It can be hard to pass on deals when they could be had just by lowering our underwriting standards a little or by focusing more on a broker's rosy pro forma than an asset's actual performance. But we learned long ago that getting pricing right, although it's not a guarantee of success, improves the chances of succeeding immeasurably, while overpaying is rarely anything but a prelude to pain. So, we stuck to our guns, and we're now poised for a hopefully outstanding 2019. And those hopes are starting to be realized. As you might correctly imagine, we spent much of the third and fourth quarters moving the ball on the recently announced Q1 transactions and beyond. In January, we purchased Oakview Heights, in Illinois, for $9 million as a tack-on for our existing tenant, WLC Management. And earlier this week we closed on a four-building sale leaseback with another existing tenant, Covenant Care, for just under $44 million. This transaction allowed us to consolidate and eliminate three separate short-term standalone leases that we had picked up in a prior deal, and rolled them and the new assets together into a single unified long-term master lease with Covenant Care. Lastly, as Greg mentioned, we recently AKed [ph] a definitive agreement to purchase 12 facilities in the Southeast for $211 million, which we currently anticipate will close in Q2 if we are successful in obtaining the several remaining approvals and transition agreements. Moving to our pipeline, it sits today in the $275 million to $300 million range, and it almost exclusively made up of skilled nursing assets, and includes projected tack-ons with existing operators, as well as deals that we can pair with new operators. Please remember that when we quote our pipe we only quote deals that we are actively pursuing which meet the yield coverage and underwriting standards we have in place from time to time, and then only if we have a reasonable level of confidence we can lock them up and close them. And now, I'll turn it over to Bill to discuss the financials.

Thanks Mark. For the quarter, we are pleased to report that normalized FFO grew by 14% over the prior year quarter, to $27.1 million. Normalized FAD also grew by 14% to $27.9 million. Normalized FFO per share grew by 3% over the prior year quarter to $0.32, and normalized FAD per share also grew up 3% to $0.33. Given our most recent dividend of $0.205 per share, this equates to a payout ratio of 64% on FFO and 62% on FAD, which again represents one of the best covered dividends in the healthcare REIT sector. We have continued to strengthen our leverage and liquidity positions. To that, for the quarter and through today, we have issued five million shares at an average price of $19.73 resulting in $96.7 million of net proceeds. For 2018 and year-to-date, through today, we issued 12.7 million shares resulting in $227.3 million of net proceeds. We also just closed on a new $600 million revolver and a $200 million seven-year term loan, reducing our borrowing costs again, and pushing our earliest debt maturities out to 2024. The proceeds from the term loan we paid off the entire revolver, we also have $22 million of cash on hand as of today. Today, with just $5.8 million in authorization left on the ATM, so we plan to put up a new one shortly. As Greg noted, we intend to use it to match fund smaller deals when we can, and for larger deals we can still raise equity via overnights, but we intend to do so judiciously as long as health and intelligent growth of CareTrust has been paramount in our decision making, and we intend to keep it that way. For guidance in yesterday's press release we initiated our 2019 annual guidance range projecting normalized FFO per share of $1.30 to $1.32 and normalized FAD per share of $1.35 to $1.37. This guidance includes all investments made today the recently completed credit facility amendment, a diluted weighted average share count of 88.6 million shares and also relies on the following assumptions. One, no additional investments or dispositions nor any further debt or equity issuances this year. Two, inflation based rent escalations, which account for almost all of our escalators, and then at an average of 2%. Our total revenues for the year again including only acquisitions made to date are projected at approximately $153 million which includes approximately $1.8 million of straight-line rent. Three, our three independent living facilities are projected to do about $500,000 NOI this year. Four, interest income of approximately $2 million. Five, interest expense of approximately $26 million. In our calculations, we have assumed a LIBOR rate of 2.5%. That plus the nearly reduced grid-based LIBOR margin rates of 125 bips on the revolver and 150 bips on the seven-year term loan make up the floating rates on our revolver and term loan. Interest expense also includes roughly $2.1 million Of amortization of deferred financing fees. And Six, we are projecting G&A of approximately $12.8 million to $14.2 million. Our G&A projection also includes roughly $4.4 million of amortization of stock comps. As for our credit stats calculated on a run rate basis as of today our net debt to EBITDA is approximately 3.3x, leverage is about 20% of enterprise value, and our fixed charge coverage ratio is approximately 6x. We also have $22 million of cash on hand. And with that I'll turn it back to Greg.

Thanks, Bill. We hope this discussion has been helpful. We thank all of you again for your continued support and with that we'd be happy to open it up for questions. Valerie?

Thank you. [Operator Instructions] Our first question comes from Jordan Sadler of KeyBanc Capital. Your line is open.

Thank you, and good morning out there.

Good morning.

Good morning.

Morning. First question is regarding the 8-K and the commentary, Mark you offered regarding the portfolio that you guys are under contract on, that $211 million, is there any incremental information you could share at this point regarding that portfolio surrounding markets or coverage? That would be helpful.

Yes, this is Greg, Jordan. Honestly, we've tried very much to sort of downplay that transaction. We had to file the 8-K because the SEC regulations required an 8-K to be filed when a definitive material agreement is entered into. Even if that agreement contains multiple contingencies, diligence and other hurdles left to clear. So we're not out of the woods on that yet. We don't -- we do have a number of things that have to be done yet. There are multiple parties involved. We really don't have their permission to talk very much about it. And we will give you more information as hurdles are cleared and a hope towards [indiscernible] draws nearer.

Okay, are there any milestone dates or events that we should look for or…

Yes, there's a number of things that have to be done, but the situation is a little bit fluid. Yes, there are some approvals that have to be obtained and I'm not sure that we know exactly what dates those approvals have to be attained by. We do know that there are some regulatory filings that have to be made here this week and those are being made. So right now I would tell you that it's so far so good. But we're not counting our chickens before they're hatched.

Okay, would you say if these assets are an existing market or not?

Some are and some aren't.

Okay. And then are they also included in that pipeline of 275 to 300?

Yes, they are.

Okay. And then maybe one for you, Bill, in the guide -- I might've missed this, what's the escalator embedded in the guide for the year?

2%.

It's 2%. Okay, thanks, I'll hop off.

Thanks, Jordan.

Thank you. Our next question comes from Jonathan Hughes of Raymond James. Your line is open.

Hey, good afternoon and very good morning on the West Coast. Thanks for your time and earlier commentary. On the $43 million covenant deal announced earlier this week, that was a sale leaseback, which -- it is not your typical strategy, turnaround strategy, I realize that was an existing relationship, but do you see more opportunities for those kind of traditional sale leasebacks with your existing operators for properties they operate that you don't already own?

You know, there are a few operators that own some real estate but I think for the most part those opportunities are few and far between. As you know most of our -- or a good chunk of our operators have -- we've given them their start and have kind of launched them, and then there are some kind of -- we'll call it more mature operators that have some existing buildings, and those existing buildings are a combination of owned and leased assets. So I wouldn't say this would be the norm for us.

Yes, Jonathan, between -- for covenant in particular, between the four assets be acquired and the five assets that we took the mortgage on, that represents their owned real estate for them.

Okay. All right, fair enough. And then maybe one for Dave, I was hoping you could talk about Texas where you derive about 20% of rent, can you just talk about skilled nursing fundamentals for the portfolio there maybe occupancy or coverage and how your portfolio is performing, and what's been characterized as a challenging market by some of the other skilled nursing operators there?

Hey, Jonathan, this is actually Mark. So since I cover Texas, I can probably take this. So as you know our two operators in Texas are Ensign and PMG. Dave's comments with respect to PMG were the three Kindred assets that we took over. They continue to do well in those assets, there's four other buildings that we acquired back in 2016 with -- and they continue to do well. And so I think it's safe to say that our portfolio in Texas is performing well, but I don't necessarily have coverage metrics at my fingertips. But that state you know, the Medicaid rate, it's not secret it's is not great. I think it's second to last in of all the states in terms of Medicaid rate and -- but from a fundamental perspective development come way down, you don't see buildings popping out of the ground like you did say three or four years ago. And then there are obviously some troubled operators that are currently going through some things in the state and -- good, flexible operators that we target, the Ensigns, the PMGs of the world have been able to kind of manage the roadblocks and we think -- is he bed tax going to pass? Possibly. Quit three is getting hopefully, another $200 million in funding. So we still feel very good about Texas and certainly about the operating metrics of the tenants there that we have.

Okay. That's great. The 35 or so properties you have in Texas, are what 25 or so were Ensign?

Probably 28, because seven are PMG, right?

Yes, correct.

All right, and then just one more, and maybe this one's for Dave, but -- and I know it might be a tough one to answer, but it's about PDPM. It's supposed to be budget neutral. Most projection for operators, at least, the projections I've seen are I guess, positive or breakeven. Is there a chance that revenues would ultimately actually fall short? I'm just trying to understand the downside to PDPM since most only talk about that upside opportunity?

Yes. This is Dave. A really good question, I'll give you a -- and it's tough to comment on the entire industry, but I'll give you a little anecdote. Eric and I were meeting with one of our Midwest operators a couple of weeks ago and as we were drilling down deep into their operations, we did talk about PDPM. They use the largest electronic medical record system in the space right now, I believe, and PCC is doing analysis and doing projections for all of their customers. For our operator that we were with they showed a significant increase to their revenue, which is great, because most of that is going to just drop to the bottom line, and I'm not even factoring in any deficiencies that they're going to get by having a flexibility around their therapy cost. And I asked the same question that you're asking which is -- I bet they say that to all the girls. And his response was actually it's about 50-50 and when they talk to PCC about that, PCC said that this is a fun product that we're having with you, but they don't all sound like this, because some people are in a situation where they have to make some serious changes or they're going to be in a tough spot. So I think that's good news, because if everybody, of course, does much better then you might see a situation like we saw in 2011 with Rugs Four [ph] where they reversed course really quickly. As we can view the future it looks like there are going to be winners and losers here and even for those who may not be winners on the top line they will have the flexibility with how they staff therapy to do better.

That's great. And then again no operators in your stable -- that latter camp where it might be concerning?

Not that we're aware of. We haven't done that deep dive with everybody on PDPM. But the operators that we have talked to are positive about it.

Okay. That's it from me. Thanks for taking my questions.

Yes, Jonathan, it's Greg. I would just add one thing and as Dave mentioned we're still talking to operators about that. Something new that we're doing is in next month we're holding an operator conference here in Southern California for all of our skilled nursing operators to come in. And PDPM will be front and center on the agenda for discussion there. So, by this time, 30 days from now or so, we should have all those answers in the bag.

Great. Look forward to hearing more about it.

You bet.

Thank you. Our next question comes from Chad Vanacore of Stifel. Your line is open.

Thanks. So historically, your target leverage had been in that 4x to 5x, but you're currently sitting underlevered around 3.3x. Should we think about you remaining on the lower end of that historical range through 2019 or popping back up to the middle of the range through acquisitions?

Hey, Chad, it's Bill. All that will depend on investment flow and where our equity is trading as we continue down 2019 -- but I think for modeling purposes, if you keep it towards the lower end of the range that's probably a good safe bet given where we're trading at today.

All right. Thanks, Bill. So now, I think your pipeline remains strong, close to $300 million, is that largely sniffed, and then we had had discussions about the transaction market maybe in 2018, not looking as attractive to you. What's making 2019 look more attractive?

So, the answer to that first question -- and this is Mark, is, yes, it's predominantly sniffs. In terms of 2019, you know, I don't know that I have a specific answer. As I look at the pipeline I think it's made up of current assets that are just not strategic to specific operators, and so they want to go ahead and get rid of those assets whether they are not geographically kind of in the foot prints or for whatever reason they just don't make sense for that specific operator anymore and then other assets were you have the operator just wants to exit and for whatever reason. So I don't know that we are seeing a particular pattern so far in 2019 I can tell you we've seen an uptick in total transactions from you call it late in the year we are seeing a lot of deal flow, we are seeing probably a little more on the assisted living in senior housing side then the skilled nursing space right. Nick is next week so I would anticipate brokerage committee holding deals back to be able to preview those at the one-on-ones next week. So I don't know that there's a specific pattern so for 2019 as to why deal flow is picked up but we are seeing that in numbers.

Mark, you mentioned, maybe seeing some exciting operators any one coming you saying, hey, PDPM is coming up later in the year, we have to make some investment, take advantage of that maybe we don't particularly want to make that investment. So look upon to sell to another operator?

o, I think there are we're seen mom and pops that we are still looking to sell and nobody is specifically said, hey, PDPM is coming in and we just want to monetize I think the brokerage communities done a very good job of letting those mom and pops to know what the investment is going to need to be in PDPM to be successful. So I'm sure that has some, you know some very but I don't think we've seen mom and pops that are saying, Hey we are heading for the hills, we don't want to go through another change. I'm sure maybe there's a small fraction of thinking about PDPM and the changes help them to get off the sidelines but at the end of the day you have mom and pops that are looking at you know relatively low cap rates and can monetize their assets today and you know certain dates for good numbers on a price for bet basis.

All right. There is one more question for me with this probably better answer are correct. What kind of consideration that even increasing the dividend just given that it's pretty low payout ratio and have you measure that versus reinvestment or in here acquisitions?

If you look back historically our dividend patterned every year we have raised that dividend and we have and it typically gets raised in the first quarter of the year. So I would anticipate a dividend increase coming by the next quarter. But we've always looked to keep that dividend at the low end of the peer group in terms of payout ratio and our investors who been very supportive of our philosophy of planning as much of that back into the company by way returned earnings as we can each year and it's service well.

When you think about the dividend growth, we first their taxable income, so is our GAAP income increases every year with investments. We have to raise the dividend just to clear the taxable income.

Our next question comes from Michael Carroll of RBC capital Markets. Your line is open.

Thanks Greg with that portfolio deal that you announced, what is the bigger stumbling block that you have to get through is it that you have to complete your due diligence or do you have to wait for the seller to officially take control these facilities?

You know diligence is largely completed, we actually got some good news on that just this morning and but there's lots and lots of decision makers involved in various steps of the process and it's a little like herding cats and we don't have the whip on this one. So we are doing our best to keep up with it and to see that he gets down to, its intended and logical conclusion but it is not a simple transaction by any means. Anytime you get that many parties in the deal the difficulty of getting it done goes up exponentially and that's just where we are at. But we're used to complex deals, we closed some deals that were similar, probably not as difficult but similar in terms of their size and number of parties' complexity at the end of 2017, and we're constantly optimistic that we can do it again.

Okay. I know these are pretty good assets in good markets. But would you consider this a transition portfolio since you're switching out the operators? Or how difficult will that be?

I would say that part of the portfolio is a small part of the portfolio is -- a small part of the portfolio is transitioned but a large part of it's pretty stable. There's still some upside in all of it, but we feel very, very good about the assets and what we're paying for them and we feel very good about the operators we're bringing into run them.

Okay, great. And then, Mark related to valuations. How have you seen cap rates for the product overall? Have you seen them ticking a little bit lower giving them more attractive market and maybe PDPM coming in towards the end of the year?

No, I don't think so. I think, you still have markets and states, states like California, Virginia, Maryland; call it a price for better or even on a cap rate basis or are still where they were two or three years ago. So, very attractive states are maintaining. I think maybe call it some of the secondary states where you have lower barriers to entry. Most of those states or most of the deals that we're seeing in those states are maybe not cash flowing and are trading at a price per bed. So, I think in general, maybe the notion is that cap rates are moving up, I would say that's probably the case in some of the secondary and tertiary markets in states but in the primary markets, good cash flowing, skilled nursing assets are still trading that, historical norms over the last -- what we've seen in the last two or three years.

Okay. Great, thank you.

Yes.

Thank you. Our next question comes from John Kim of BMO Capital Markets. Your line is open.

Thank you. Good morning on the $211 million portfolio acquisition, how did you come up with the 12 assets where they, did you cherry pick them from a larger portfolio or were these the assets, the seller marketed for sale specifically?

Yes, John, Greg, it's Greg. I know that Mark is weighing in on this too. But for lack of a better term, we did cherry pick it to a certain degree, it doesn't mean every asset is a high flyer or perfect like I just said there's still some upside left across the portfolio but the good news is that the operators we are bringing in to run these are all experienced operators who are in those markets, who know those markets extremely well and who see the remaining upside in what are arguably stabilize or pretty close to stabilized assets and we're pretty optimistic about the future of that investment.

You mentioned one of them leased, one of the new operators will be an existing relationship, is that -- can we assume that [indiscernible] are in the market with you?

But yes, we're not ready to discuss that yet.

Okay. And then, the 12 separate special perfect identity. I'm just curious, is that typical for portfolio exhibition the way that you structure the acquisition?

Yes, John. This is Mark. It's really just a function of this structure it -- we're purchasing the membership interest in the entities from the buyer. I mean this is -- it's not uncommon, it's historically we've done this maybe once or twice so but it's just a function of this transaction.

Okay. And then, I'm not sure if I missed this earlier but on your acquisition pipeline or just opportunities that you're looking at. Can you just discuss what you're seeing in your housing?

Yes, senior housing is really kind of a mixed bag and there's everything from call it non-stabilized, barely cash flowing, primary, secondary, tertiary markets to stabilize. So, we are certainly tracking and underwriting these types of deals, but its senior housing right now seems to be, a mixed bag. Now granted, we are not seeing everything and we're, probably seeing mainly kind of tertiary and secondary markets, which we've historically acquired in but it's really a mixed bag and there's a decent amount of deal flow in the market for those property types in those markets.

Is there a preference that you have in senior housing as far as value add or higher growth versus something with a more stable?

Yes, I think our presence is stable and cash flowing maybe if you can do some value add by way of investing some CapEx and -- but as you know, turning to senior housing asset is a lot different than turning a sniff asset, you can turn to sniff asset, possibly in three to six months. Turning to senior housing asset, it can take years and that's not really, that's not really a space that we want to play in and we're a lot more comfortable seeing a skilled nursing facility that has some immediate upside via changes in the cost structure we will take, a little bit of a risk on from that perspective but on the senior housing side, it's a long tough slog to fully get a building nurse back to health and so that I would say stabilized colorful core would be our preference.

I appreciate it. Thank you.

Okay.

Thank you. Our next question comes from Todd Stender of Wells Fargo. Your line is open.

Hi, can you hear me, Okay?

We can, Todd.

Great. Thank you. Just looking at the Covenant Care transactions, where are the new properties in California? I guess in relation to the existing ones, and then what coverage where they underwritten that and what were the existing ones covering at?

So the property locations are one in Northern California and three in Southern California. When you blend the entire portfolio of all eight buildings, I believe the coverage including what we call cost is up in the 14 to 15-time range. I don't have in front but we can circle back after the call but while covering assets on a on a completely blended basis with the one master lease, so across the eight assets, it's doing well.

And the new ones were -- this is a sale lease back. So Covenant Care was selling assets. Is that correct?

That's right

Okay. And then, my part two of the question is, looks like the mortgage you provided Covenant Care is securing a couple or a few assets in Illinois. Can you provide the terms on this where I eventually want to go but the question is that, as a potentially monetized more assets? Is this going to be just your standard issue short-term mortgage? Or could this confer to see simple interest as they, look at tax advantaged methods to unload more real-estate?

Yes, Todd. This is Greg. This is that piece of the transaction was a little unusual for us. They were trying to, sort out their capital stack, it made sense for us to give them a small mortgage on five assets at a 9% rate in a very short-term. We don't anticipate these assets converting to our ownership nor frankly, do we anticipate those assets staying with Covenant Care for a very long time.

Okay. So they could come to market and at that point maybe you look at them?

We have looked at them and in and we're happy to lend on them, but we don't see them as acquisition opportunities for our part. We have an Illinois operator we liked a lot, but I think five more buildings for him in the near-term would be more than we want him to take on.

Understood. Okay, thank you, Greg.

Thank you. [Operator Instructions] One moment, please. Our next question comes from Daniel Bernstein of Capital One. Your line is now open.

Hey, guys. Again, this might be a little bit more hypothetical but with the PDPM coming in and maybe the margins moving up on rehab. Are you talking to any operators who are looking to bring rehab back in-house? And do you think that maybe, if it doesn't improve lease coverage, does it improve your fixed charge coverage, corporate coverage and guarantees with your operators and how you thinking about that in terms of future underwriting?

Hey, Daniel. This is Dave. Yes, there we are talking to our operators about that. And there's a lot of discussion that they're having internally and with their rehab providers to see which format makes sense and they are -- several of them are planning on going in-house with rehab and if they're not, they're in active discussions with their therapy providers to come up with a different arrangement to pay for those therapists as they are now not so much a profit center but a cost center, so that's in motion right now and I think it will -- we see different ways to skin that cat as the months progressed.

Okay. But do you think it might be something that can improve the corporate coverage and support for your leases on a longer-term lease, I'm just -- that's what I'm getting at?

Yes, we do and it's really difficult than to quantify that yet. All of the operators are going to treat it a little bit differently in terms of what kind of reduction to the therapy cost that Bill experienced and so all we can say right now is that common sense says that it will improve margins. But it's just too difficult to quantify that at this stage.

Okay. And then, in terms of your pipeline, the number you gave out, obviously has a large portfolio in there, but the rest of it and is that mainly acquisitions? Are you thinking about funding any more mortgages or development, just trying to understand the composition there and acquisitions versus something else?

Yes, Dan. This is Greg. So funding mortgages is not something that we normally go out and look for. We've done it a couple times to facilitate acquisitions. We have a mortgage with Providence up here in San Bernardino. And now we have these mortgages in Illinois with Covenant Care, but both of those mortgages were short-term mortgages that facilitated a larger transaction. In terms of development, we currently have the two development projects that are now being completed and are at least are in lease up, up in the Idaho with Cascadia Healthcare. They're doing super well and we're really excited about them and we could look to do more development on a very, very limited basis down the road, if it makes sense. It's really hard. It's really hard to get new development to pencil when you compare it to simply buying and improving existing nursing home stock but occasionally you can find that sweet spot and we have done that in the Boise near the area.

Okay. That's good. That's all I have. Thank you.

Thank you.

Thank you.

Thank you. I'm showing no further questions. At this time, I'd like to turn the conference back over to Greg Stapley for any closing remarks.

Thanks, Valerie. And thank you everybody for being on the call. Obviously, we appreciate your support and if any of you have any additional questions, we are here and ready to answer for anyone and everyone. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.