CareTrust REIT, Inc. (CTRE) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the CareTrust REIT Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, after the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Lauren Beale, CareTrust's Controller. Thank you. Please go ahead, ma'am.

Welcome to CareTrust REIT's third quarter 2019 earnings call. Participants should be aware that this call is being recorded and listeners are 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. 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 reasons. During the call, the Company will reference non-GAAP metrics, such as EBITDA, FFO and FAD or FAD and normalized EBITDA, FFO and FAD. When viewed together with 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. 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 website at www.caretrustreit.com. A replay of this call will also be available on the website for a limited period. Management on the call this morning includes 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.

Thank you, Lauren. Good morning and welcome everybody. As we previewed on our last earnings call, we view the fast start to our year as an opportunity and maybe even a mandate to carefully re-examine our real estate portfolio and our tenant relationships. And after five years, a lot of success and a few challenges, a deep dive on our assets and operators suggested that we could strengthen the portfolio. These critical reviews led us to take decisive action on a number of fronts. Team will explain them more in detail in a moment, but high level, we've disposed of certain less desirable assets, began recycling the capital into more desirable assets and worked aggressively to backfill a few pockets of current and potential weakness that we saw in our tenant roster. Some of these changes like the previously announced exit of Trillium from a portion of our Ohio portfolio have been completed now. One other remains in process and we expect it to be completed shortly. Our goal has been to rinse out any real softness in the portfolio and position CareTrust for solid operating performance going into 2020 and beyond. This is why we very intentionally executed on all of these changes at once when the conventional wisdom might have been to handle them sequentially and spread them out over time. It's been a lot of work for everybody on the team here from acquisitions to asset management to accounting, and I'm proud of the great work that everyone's done within a remarkably short period. We did so because we believe that principles of sound stewardship requires not only to grow and diversify earnestly, but to pruning the portfolio responsibly from time to time. It also reflects our commitment to aggressively tackle small problems while they are still relatively small. We believe these operating philosophies rigorously applied will produce the best overall long-term results for CareTrust and our stakeholders. We further believe that this approach will continue to foster an atmosphere of accountability and high performance both for us and for our operating partners. We're building a strong healthy and expanding organization that will stand the test of time. In addition, this quarter, we've also re-examined some of our accounting and disclosure policies. We're no longer the tiny start-up we were five years ago. With our increased size and growing tenant diversification and established track record, we've determined that going forward we will increase our disclosure and transparency by disclosing lease coverage by tenant for our top 10 tenant relationships. This is something that we've been planning and wanting to do for a long time, when the time was right, we're excited to finally be able to roll it out. As far as the year goes – the rest of the year goes, we are pleased to be reaffirming our 2019 guidance for a normalized FFO and normalized FAD notwithstanding the portfolio adjustments we've made this quarter. Looking into the future, with so many changes in the quarter, we felt we should again, for transparency sake, offer a preview into our 2020 earnings estimates a little early this year so we have that guidance and some color on it for you today as well. With that, I'd like to turn some time over to Dave to talk about both current operations and the changes we've been making, then Mark will discuss recent acquisitions in the pipeline, and Bill will wrap up with the financials and guidance. Dave?

Thanks, Greg, and good morning. On our last call, we discussed how we are regularly reassessing both our portfolio and our operators to determine what changes, if any, are we made to either one. I talked in detail about our decision to replace Trillium in Southern Ohio. For the seven facilities there, we told you, we plan to sell three and re-tenant four. I'm pleased to report that's exactly what happened on September 1. The two most challenging facilities and one other were sold for $28 million, the remaining four were released to our current tenant Providence Group and added to their master lease. In addition, since our last call, we continue to shore up lingering softness in the portfolio by replacing an assisted living operator, resetting rent for a skilled nursing operator and deciding to sell our skilled nursing assets in Michigan. Let me give you some color on each of those three actions. First, effective November 1, we replaced Priority Life Care with Noble Senior Services. This portfolio consists of seven assisted living facilities in four Eastern states. There is no reduction in rent associated with this change. The impetus for the change was a combination of inconsistent performance and priority the strategic shift towards focusing entirely on their consulting and management fee business, instead of leasing, real estate and owning their operations. That being the case, it was clear to us that another operator would likely be able to perform better in these assets and we made the switch. Second, after 18 months of closely monitoring, we decided to reset the rent for our seven facilities in Central Ohio. In prior calls, we've commented on Trio's hard work and the momentum they've built in spite of inheriting some damaging challenges from the previous operator around the time of transition. For example, one building was designated as a special focus facility right before Trio stepped in and several others were kicked out of a preferred provider network right around the time of the transition. They have fought back from these challenges and others, but this quarter, it became apparent that we can no longer view this portfolio's performance as only our runway or timing issue. And so we adjusted the rent by approximately $4.2 million annually. In the supplemental, please note that Trio's coverage reflects their new rent against their TTM EBITDA, and with extra visibility there, we believe their pro forma run rate coverage is approximately 1.2x as performance has been trending ethically. Third, let me talk about Metron in Michigan. Metron recently notified us that the state of Michigan had assessed Metron for millions of dollars in Medicaid overpayments after auditing prior year's cost reports. Shockingly in the next breath, they told us of their intent to exit operations and after initially assuring us that they would intend to pay the rent through the transition, they later said, they would no longer be paying Metron's contractual rent of roughly $350,000 a month until we replace them. We quickly pursued all options, including the parallel paths of either re-tenanting or selling. We now have the portfolio under contract to sell, subject to normal diligence, transfer documentation and licensure. We anticipate proceeds from the sale to be approximately $37 million, resulting in an impairment of approximately $8.8 million. We expect the sale to close within the next few months. As a result of the changes we've made, we've improved both the lease coverages and the tenant credits to back these assets. Proceeds from the Trillium and Metron sales will be recycled in the paying down debt and redeployment into more desirable investments. In addition, we have further expanded our growing bench of backup operators who are eager to step up in case the opportunity presents itself in the future. With these changes, we are pleased to say that we have significantly de-risked our portfolio in a relatively short period of time and these issues are or very soon will be all behind us. The long-term benefits of these changes can't be over-emphasized. Looking at the broader industry, of course, the big news is the implementation of PDPM on October 1. We expect there to be a bit of a learning curve before operators really hit their stride. But in talking with our SNF tenants, they've indicated that the changes are going fairly smoothly and they remain optimistic. So to sum up, we really achieved three important objectives so far this year. First, record new investment growth, with number two, significant portfolio derisking, while number three, maintaining industry-leading low leverage, and we are going into 2020 from a position of significant strength. And with that, I'll hand it over to Mark to talk about the pipeline. Mark?

Thanks, Dave, and hello, everyone. In Q3 and since we've closed approximately $35 million in new investments. This includes $12.5 million acquisition of Vista del Lago, a 52-unit memory care facility located in the Northern San Diego suburb Escondido, with an old friend from the industry, but a new tenant to our portfolio, Bayshire Senior Communities. Next, we acquired a 70-bed skilled nursing facility located in Modesto, California which we paid $8.6 million for, and also 99-bed SNF and 72-unit assisted living campus in Sacramento that we picked up for $14.2 million, both of which have been leased to our existing tenant Kalesta Healthcare. The numbers quoted for all of these deals were inclusive of transaction costs and the initial yields are all disclosed in our supplemental. Year-to-date, our total investment amount is $340 million at a blended yield of 8.9%. We are targeting a year-end close for our preferred equity investment, Cascadia of Boise which is the brand new state-of-the-art 99-bed skilled nursing facility located in Boise, Idaho, and the Twin Sister of the Nampa facility we acquired a few months ago. Turning to the market. We've seen a bit of a slowdown in actively marketed SNF deals, which we believe is mostly seasonal. Based on conversations with the brokerage community, we would expect to see a pickup in SNF opportunities in the New Year. We continue to lean on our existing operating base as well as our deep industry relationships to bring us both marketed and off-market transactions that we compare with our best operators. On the senior housing front, we continue to see smaller, but compelling opportunities that we believe can be accretive to us and our operators. So we are optimistic that we'll be able to add to our seniors housing portfolio over the coming quarters. The pipeline as we sit here today is right around $100 million. It consists mostly of singles and doubles and includes almost exclusively of tack-ons for our existing operating partners. Please remember that when we quote our pipe, we only quote deals we are actively pursuing which we think yield coverage and other underwriting standards we have in place from time to time, and then only if we have a reasonable level of confidence that we can lock them up and close them. And now, I will turn it over to Bill to discuss the financials.

Thanks, Mark. For the quarter, normalized FFO grew by 30% over the prior year quarter to $33.6 million or $0.35 per share and normalized FAD grew by 30% to $34.5 million or $0.36 per share. Our payout ratio remains at or among the lowest of our peers at approximately 64% on normalized FFO and 63% on normalized FAD. Leverage is near all-time lows at a net debt-to-normalized EBITDA ratio of 3.4x and net debt-to-enterprise value of 20% as of quarter end. For the transactions, Dave noted, this resulted in total impairments of $16.7 million, reserves and write-offs of straight-line and other rents of $12.1 million and a provision for loan loss of $1 million. But we expect the longer-term benefit of this quarter's changes is a stronger and much more predictable platform to grow from in 2020. This gives us an opportunity to provide an early view into what 2020 is shaping up to look like, and so we are issuing guidance for next year today. Preliminary guidance for 2020, we expect normalized FFO per share of $1.36 to $1.38 and normalized FAD per share of $1.40 to $1.42. This guidance includes all investments made to date including the expected close in Q4 of our remaining preferred equity investment, all tenant restructures discussed, property sales as discussed with the proceeds applied to outstanding borrowings on our revolver, a share count of 95.6 million shares and also relies on the following assumptions. One, no additional investments or dispositions nor any further debt or equity issuances next year. Two, inflation-based rent escalations, which account for almost all of our escalators at an average of 1.75%. Our total rental revenues for the year again, including only acquisitions made to date are projected at approximately $166 million which only includes about $700,000 of straight-line rent. Lastly, not included in this amount are tenant reimbursements which we previously accounted for on our own line item in the income statement. Due to the new leasing standard, this has now grouped with rental revenues. Three, our two independent living facilities are projected to do about $200,000 in NOI next year. Concurrent with the Ensign Pennant spin, we leased one of our independent living facilities. Four, interest income of approximately $3.8 million. Five, interest expense of approximately $26.4 million. In net calculations, we have assumed a LIBOR rate of 2% and a grid-based margin rate of 125 bps on the revolver and 150 bps on our seven-year term loan. Interest expense also includes roughly $2 million of amortization of deferred financing fees. And six, we are projecting G&A of approximately $12 million to $13.5 million. Our G&A projection also includes roughly $3.2 million of amortization of stock comp. Heading into 2020, our leverage and liquidity positions will continue to remain strong. We did not sell any shares under our $300 million ATM that we put up in Q1 and our revolver balance currently sits at $73 million. So our credit stats calculated on a run rate basis as of today, our net debt-to-EBITDA is approximately 3.4x, leverage is about 23% of enterprise value and our fixed charge coverage ratio is approximately 6.2x. We also have $17 million of cash on hand. Finally, you'll notice in our Q3 supplemental that we've listed operator-specific coverage by EBITDAR and EBITDARM for our top 10 tenants, giving you a clear view into the operator-specific coverage of 85% of our revenue. Remaining 13 tenants representing approximately 15% of our revenue, so we are disclosing those in one line item. This change puts an exclamation point on all the parties that is regarding the overall quality and financial stability of our operator pool, following this quarter's changes. And with that, I'll turn it back to Greg.

Thanks, Bill. We hope this discussion has been helpful. We thank you again for your continued support. And with that, we'll be happy to take questions, Bridget?

Thank you. [Operator Instructions] Our first question comes from the line of Chad Vanacore with Stifel. Your line is open.

Hi, good morning. This is [Todd] on for Chad.

Hey, Todd.

Yes, hi. Thanks for the additional details you provided under rent coverages for your top tenants. We just have one suggestion if you could break down the coverage ratio on the various property types, like you did before, that would be great. And my first question is, just wanted to understand the trajectory of the coverage decline for the tenants you took to the laundry this quarter? Did you see like a faster deterioration in the third quarter that prompted a more broader set of actions that you're taking regarding the portfolio? And I think the market is kind of surprised by the change of the narratives. Is there any color on the back on the decision process? That will be much appreciated.

Yes, this is Dave. I'd say that each of these changes to the portfolio, you really need to take case by case. We feel good about how quickly we dealt with them when they became actionable which really happened in the quarter. So besides that, I'm not sure what more color to give generally speaking, we'd really have to talk case by case.

But in terms of coverage, did you like change materially during the quarter?

Again, you have to look at it case by case. With Trio, the coverage has been a concern for a while. But as we were looking at the performance alongside them, we had been viewing this as a runway and timing issue until this quarter, not that something happened in this quarter dramatically different from before, we just came to the conclusion with them that we can no longer view it that way, and the facts on the ground really warranted the change there. When it came to Priority Life Care, the decision there was made because they had strategically – they had made changes to their strategy as a company. They wanted to focus primarily on consulting and management fee. And so we ran a process to see what's the best change to that portfolio would be, whether it'd be selling or re-tenanting. And so there wasn't a major change in the quarter per se, but it was the quarter that we could act on it. With Metron, as I said in my prepared remarks, that did shock us. There's really not much more color we can give on Metron, because it's an ongoing matter. But beyond what I put in my prepared remarks there, but what we do, if you can't feel good about that situation at all, which we really don't, but what we can feel good about is acting on it as quickly as we did, that could have been an issue that would linger for a long time, but we were able to get it under contract to sell within the quarter and it's fairly well along the path of closing. The State of Michigan takes a little bit longer than others in terms of changes in ownership, and so we're waiting regulatory approvals there, but feel like we handled these promptly.

Great. And my second question is regarding Pennant. So it looks like the coverage right now is 1.37, it's pretty good, and there seems to be also have the guarantee from Ensign. I saw in the Q that you have some coverage hurdle that Pennant has to cross for Ensign to drawback the guarantee. Would you be able to disclose those and how do you think about your relationship with this new entity?

This is Greg. We love this new entity. We know these guys very, very well. They are superstars in every sense of the word and we have high praise and high hopes for their future as a standalone company. We wouldn't be surprised at all if they experienced some growing pains here early on, but we have great confidence in them over the long term and hope to be able to expand our relationship with them in time. In terms of the Ensign guarantee, obviously, that's a very, very solid guarantee and was part of their pledging willingness to not do anything that left us in a negative position vis-a-vis where we were with them when these assets were in their portfolio. And as long as these assets get back up to where they were before the spin, we'll feel very comfortable that that guarantee can go away and Pennant will be standing strongly on its own.

What is the level of coverage before the spin?

It was about – in that piece of the portfolio, it was right around 1.8x.

Okay, great. That's it for me. Thank you.

You bet.

Thank you. And our next question comes from the line of John Kim with BMO Capital Markets. Your line is open.

Thank you. I'm still a little confused with the Metron situation. I'm just wondering, I mean is this something that another one of your tenants can do just basically walk away from their lease without any termination fee or recourse?

Hey, John, it's Greg. As Dave mentioned in his prepared remarks, that's still an ongoing matter, but you shouldn't assume that anything is concluded there yet other than our entry into that contract to sell the assets.

Can you remind us when you purchased those assets and had Metron as an operator?

Yes. It's recent – it’s early 2018.

Okay. On the Trillium sale, it looks like you provided financing to the purchaser for 95% of the purchase price? Is that the case and can you provide any terms on the mortgage debt?

Yes, John, it's Bill. We did provide financing on it. So it's a short-term, call it, bridge financing, while they go out and get perm financing, it's almost $28 million and the interest rate on it is 10%.

Okay. And how short-term is that loan for?

I think its March 2020.

Got it, okay. You provided some new disclosure, which was very helpful, but I was wondering if you could still provide some of the disclosure from the last few periods including the EBITDAR coverage by property type, the occupancy and also the current yield that you used to provide the yields per asset type and I think the total was 10%. Are there any of these metrics that you could share with us at this time?

Not at this time. But we will take it under advisement to disclose it next quarter.

Okay, I'll just ask one last question then. So how are your underwriting transactions today? Are you willing to accept a lower yield with the higher coverage, or is that not – would that outcome still be the same, just given the specific operator issues?

Yes, John. Fair question. We crossed that bridge quite a while ago and have placed increasingly heavier emphasis on coverage as we've gone into deals. We've been able to do this in part because our cost of capital has come down very significantly since the early days and we feel like we're now in a position to really do those things that will – in a more thoughtful way than we were able to four, five years ago. So if you watch what's going on, those coverages have or those yields have been dropping a little bit and the coverages going in are stronger.

So for modeling purposes, should we be putting in 8% type of acquisition yields going forward?

Well you got to split that answer by asset class of course, and where we have not really been willing to go below 9% for example on SNF assets previously. Recently, we've been able to drop a little bit below that to make deals at better coverages. On the seniors housing front, we've not been willing to go below 8% in the past. We now have the flexibility to drop a little bit below that. We're not going down and doing any Class A, five cap deals on seniors housing. But we do have more flexibility in terms of what we can take on a yield and still get the spreads we want.

Okay, great. Thank you.

Thank you.

Thank you. And our next question is from Jordan Sadler with KeyBanc Capital Markets. Your line is open.

Thank you. Just a quick follow-up on John's question on Metron. Was there a personal guarantee on Metron?

No, there was not.

There was not. Okay. And then as it relates to, I want to kind of come back to the original sin here on Trillium, Trio and really what was Pristine and that overall portfolio because just on a look-back basis that original tenant was paying I think at the peak more than $18 million – $18.5 million of total rent. Now on an effective basis, I think the new or current tenants between Hillstone and Trio and CommuniCare and Provident are paying collectively what amounts to about more than a 40% reduction in rent. And so I'm curious about the underwriting of that transaction in that portfolio because from what I recall that was a Medicaid shop in terms of that portfolio and with reasonably low occupancy and it seemed from your underwriting that there was some potential upside. So I guess the question I'm asking is what can we take away from that deal? Where do things go sour either on the revenue line or the expense line of the overall portfolio, if you will? And is there anything to sort of – if we look through this new prism, is there anything else to be worried about within the portfolio?

It's Greg. We have done and redone and re-redone the autopsy on Pristine and debt investment many times in the four years since we made an investment. Believe me we've beaten ourselves up pretty hard over that one. And it hasn't been fun, because obviously that the problems we've had largely are that one investment that we made four years ago when we were barely a year old. In the time that that has passed since then, we have very significantly strengthened our underwriting processes, the underwriting team and have installed a number of systems that we think are making us a much better investor, while at the same time, dealing with the fallout of debt investment. Do we know what happened? We know a lot of lot of things that happened and we would be happy to take those offline. But I think your real question is what you concluded with is, do we have anything else out there that could be a problem? And I guess every landlord can look at their portfolio and say that there might be something, but as we sit here today, the changes that we've made within this past quarter have very substantially cleaned up the portfolio. And we have explained that we do have a pretty robust and rigorous ongoing asset review, operator review process in place now, full asset management team that we actually have just expanded and are going to continue to expand going forward looking at these things. And yes, we may opportunistically decide to change something else in the future, but as we sit here today, we're not projecting any material changes to the assets or the operators going forward. Does that a fair answer for your question, Jordan?

It kind of helps, but I very sincerely, I'm curious about I thought that was a barebones operations in Pristine in terms of very high Medicaid mix and limited if any Medicare senses within the portfolio. And so I'm trying – I'm curious like – so it was reasonably low occupancy and I was just curious, are they missing on the revenue side and what it like – what happened there because I thought there was – maybe there wasn't a lot of room error from the outset. But I also didn't think this was like something more traditional on the skilled mix portfolio where we've seen Medicare sense is tanking for years now and that's been eroding margin and that's sort of a more obvious story. I'm curious about the story in the Medicaid on these Medicaid jobs and what's causing them to fail vis-a-vis these leases?

So Jordan, I'd say that there – when we originally did the deal with Pristine, one thing that we weigh much more heavily today than we did then. We've always done underwriting alongside the incoming operator, right. We never kind of do that in a silo and then say, hey operator, here's your rent, right. We really work on that collaboratively with them. I think the mistake that we made then when – like Greg said back in 2015, was that we didn't know the operator very well and the operator wasn't a local Ohio operator. So one of the things that we've learned from the Pristine situation is that we give much more weight to local operators. It's not so much the size of the operator that matters. Its how successful have they been in that market? How well do they know the market and what are the relationships like? As we've had to now shop these facilities a couple of times, and since 2015, we've gotten to know more Ohio operators. It was clear – it's become clear that had we had an Ohio operator out of the gate in that, our pricing probably would have been different because there was – it was a Medicaid shop like you said and we had some very modest assumptions that skilled census could increase a bit. But ultimately those high margins for that Medicaid shop were not sustainable. And that was – it's been a hard and expensive lesson. But like Greg said, we have learned that along with others.

Okay. Thank you.

You bet.

Thank you. And our next question comes from the line of Michael Carroll with RBC Capital Markets. Your line is open.

Yes. Just real quick on Trio, I mean after the rent cut, it looks like your coverage ratios are still around 1:2. Can you talk a little bit about the performance of those assets? Have they always been this low or has it been some type of issue within the past few quarters that brought it lower?

Yes. Great question. The buildings have been – I would say, since Trio got in under considerable stress from a regulatory perspective and from a preferred provider network perspective – and therefore, from a preferred provider network perspective as well. And so for Trio, they've always been performing not like they were previously before they got in because of all of the stuff that they walked into.

Okay. So the results in the – I guess coverage on the prior rate was always at that lower level? So coverage was rate was around 0.5x for the past several quarters?

I don't have the – we'll have to get back to you on that.

Yes, specific – okay.

Yes. It was underperforming.

Okay. And then can you talk about your optimism in Noble being able to take over the priority facilities and I think half of facilities were previously leased better senior living too and they weren't able to make those properties work. So what gives you confidence that Noble's going to be able to come in and do unlock the hidden value that you're going to see?

Well, yes. I'd say the original investment in these buildings was really kind of right down in the middle of the fairway in terms of underwriting against trailing 12 type of performance. There was very little, if any, pro forma assumptions in there when we acquired them. And we've been chronically disappointed with the performance and the lack of – I'd say resources and attention that the buildings have been getting. And so we do have a different outlook on Noble and how they are bringing resources and commitment and local knowledge to these facilities that we think have been lacking.

Okay. What are they actually bringing, is it just they know the markets better than the others or are they having a different marketing plan, a different rent structure and guess what the resident moving in? And so like what are they doing differently than priority that you think that they're going to be able to drive better results?

Their approach to marketing, I think is more aggressive than priority. This is really their whole operation instead of maybe being distracted and spread out, spread thin. This is everything for them. And they have local leaders already in the State of Florida for example, that has been there that knows that market very well. So, from a marketing perspective, they have a different approach and they also see expenses that they believe that they can right-size.

Okay. And then last question from me, can you talk a little bit about Premier at least in the – top it shows that the coverage ratios are below 0.9. What gives you confidence of where those coverage ratios can go? And what's kind of the expected pro forma for that ratio once that portfolio stabilizes?

Yes. So Premier, we have a long relationship with Premier. They've been in the business a long time and have some facilities beyond ours that they've been operating for a long time. Certainly, we would like to see that coverage north of one times, they have one building in particular that is causing temporary drag on coverage that since the month of March up until yesterday coincidentally was under a ban for admitting new residents because of some regulatory challenges that they had back in March. So because of that census dropped quite a bit and luckily they have a waiting list that they can now start stabilizing that particular building. Once that is stabilized, I would expect that coverage would be about 13 to 15 bps higher.

Okay. And is that a sustainable coverage ratio, I guess it's just above one times on an EBITDAR? Does that operator making up money to make that at least profitable for themselves?

Yes, they do. And they have – we have some two very well back personal guarantees in addition to that EBITDAR. So we're really not – we don't have any reason to be concerned about the rent there. They've never missed a payment. They never hinted it even being late.

Okay, great. Thank you.

You bet.

And our next question comes from the line of Steven Valiquette with Barclays. Your line is open.

Thanks. Good afternoon, everybody. Thanks for taking the question. So I missed part of the call, so I apologize I got dropped somehow in the middle of this thing. It sounds like the Metron situation in Michigan deteriorated pretty quickly. And I guess on the decision to sell instead of re-tenant, I guess I was just curious to hear if there's any more color around that decision process and whether was part of the criteria centered around whether or not there were still room to improve skilled mix or other operational optimization variables or was it simply just based more on whether or not there were other operators that you had confidence into take over there? Thanks.

Yes, Steve. This is Greg. So the problem in Michigan with Metron wasn't really in the operations of themselves. It was in the fact that, as Dave mentioned, in the part of call you might have missed that they were tagged for a multi-million dollar Medicaid overpayment liability that was been offset against their revenues on a monthly basis. It was that offset that made it very difficult for them to see their way forward from an operational standpoint. We would like to have seen them react to it differently, but they didn't. With respect to the other part of your question, the choice between selling and re-tenanting, we actually went down parallel pass on that. We immediately hired a broker who is [Technical Difficultly] tenants or buyers as possible to look for the very best strategy for us to exit Metron. And long story short, this sale turned out to be the best strategy. We have the property under contract diligence is all but complete and we're just really waiting for licensure and some other documentation of regulatory decisions to be made now. So that speed was important to us and that probably played a larger world than normal in the decision of whether to re-tenant or sell. But we're happy to be reporting that that is headed toward a resolution.

Okay, I appreciate the extra color on that. Thanks.

You bet.

And our next question is from the line of Daniel Bernstein with Capital One. Your line is open.

Couple of questions for you, I guess one, is there any provisions in new leases that you're transferring to capture some additional rent in the future whether it's a rent reset or something else?

Yes, actually in – so of the transactions that we've done, they're all pretty normal with CPI bonds. In the case of Trio, there is the ability to share in case revenue really ramps up. So it's a percentage rent type of deal where we have the base rent that we've talked about. But as revenue ramps, we share in that together and so there is an opportunity to get more quarter-by-quarter than that base rent that we've set out.

Dan, it's Greg. In addition, the Trillium rewrite and I don't know, if we told you this last quarter that there is a significant bump in that next year, just a one-time.

Okay. Is there any CapEx needs in these facilities, as you know when operators tend to get to stress, they tend to skimp on CapEx somewhere or in their facilities that often happen. So is there any CapEx means that these facilities have and or anything or any contracts in place - commitments in place for you to provide CapEx on behalf of the operator?

Yes, we've agreed to invest a few million dollars into the Noble portfolio and that will fold into additional rent as it's – shortly after its deployed. But beyond that commitment for that transaction, all of the leases have provisions for putting CapEx in there, but we don't have a commitment beyond that for these deals that we've announced.

Okay. And going back to Metron, I don't know, if you can comment or not, but in hindsight, was there anything – any red flags that you could have cited as part of asset management, due diligence that others would have suggested that maybe there were some overpayments on the Medicaid side?

Not that we would have suggested over payments on the Medicaid side. That's a fairly new one and the magnitude of NIM was quite unusual. So no, there were some other red flags that we've identified in our review of that decision making process that we wish we had probably weighted a little more heavily. But we're taking that learning and applying it now going forward.

Okay. Okay, that's all I have. We'll see you guys next week at NAREIT.

Thanks, Dan. Look forward to.

Thank you. And next we have a follow-up from John Kim with BMO Capital Markets. Your line is open.

Thank you. Just trying to get to your fourth quarter guidance of $0.34 to $0.35 FFO, if you look at your annualized rents run rate is about $40 million and trying to compare that, let's say, the second quarter of $44 million, it's about 10% difference. So where does that make up come from? Is it from interest in other income because of the Chilean assets loan or is some other items that helps us get to that $0.34 to $0.35 number?

It's in – hey, John, its investments that we've closed subsequent to Q2, you've also got the preferred equity investment in interest and other income that's closing in Q4, and that's pretty much it.

So then the acquisitions in Q2, is that fully captured in that 160 annualized rent number on Page 8 of your supplemental?

Correct.

It's in there. Okay. Okay, thank you.

Thank you. And I'm not showing any further questions. So I'll now turn the call back over to Greg Stapley for closing remarks.

Thanks, Bridget. And thanks everybody for being on the call. If there are any other questions you feel free to call us at any time, and we will be out at NAREIT taking meetings next week. Several of the analysts have a multi-investor sessions with us and we'd be happy to chat with anyone and answer any questions you have then. So if you're going, safe travels and we look forward to seeing you there.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.