LTC Properties, Inc. (LTC) Q1 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the LTC Properties First Quarter 2016 Analyst and Investor Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Wendy Simpson, CEO & Chairman. Please go ahead.

Thank you. Good morning, everyone and thank you for joining us today. Last week we announced our two guest speakers for today's call and I'd like to welcome Dr. Craig Flashner, a Principal of Prestige Healthcare and Mr. Mark Rockwell, a Principal of Anthem Memory Care. They are joining Pam Kessler, LTC's EVP and CFO; Clint Malin, our EVP and CIO; and me on this call. Dr. Flashner's company, Prestige Healthcare, is a privately held operating company providing post-acute care, assisted living and independent living services and other rehabilitative and healthcare services at 68 facilities in seven states. Today Prestige operates 22 properties in LTC's portfolio. Mr. Rockwell's company, Anthem Memory Care, is privately held and develops and operates standalone private-pay memory care communities. To-date Anthem has developed and opened six communities in three states, including five owned by LTC and has three projects in various stages of development, all with LTC. Just last week LTC purchased two memory care properties from another operator in Kansas and these will be the first already opened an operating properties that we have done with Anthem. In the first three months of 2016, Pam, Clinton and I have had the opportunity to meet one-on-one with investors and analysts and from these meetings we took away a few recurring questions and possible concerns. Because LTC has a high concentration of non-public operators, investors and analysts may perceive they cannot get a good feel for our individual operators and may view those operators as less sophisticated and not able to effectively respond to the always changing reimbursement and competitive environments. LTC believes the local regional operator has many advantages over the larger national operator. These operators are dedicated to the space in which they operate and know the regulators, regulations, legislative proposals, licensing requirements and issues, competition, networks and referral sources, labor environment; just to name a few. Also, the local regional operator usually can make decisions about costs and revenue streams and effectuate needed operational changes more quickly than the large national provider. Later during today's call, Dr. Flashner will comment on what Prestige Healthcare does to meet operating challenges, how he sees today's post-acute operating environment and how he views the more immediate future of the post-acute industry. We're of course, not in any way denigrating our larger national operators who we continue to highly value and support. We're opening a discussion of our large investment in the local regional operator and why LTC maintains a very positive view of these operators. Another discussion point in our industry has nearly perceived over development in the private pay sector of assisted living and memory care. Mr. Rockwell's company, Anthem Memory Care has been focused on the need for dementia care specific properties. Since its inception in 2008, Mark and his team have strategically selected markets and built dementia care facilities. Mark will discuss how Anthem came to be, why they are in the markets they are in, how they select markets and how he and his team view the competitive environment. First though, I'll turn the call over to Pam who will comment on our productive first quarter. We had success in both acquisitions and financings. After Pam's presentation, Clint will discuss our pipeline and operating statistics. Before I ask Craig and Mark to talk about their companies, I will give you updated guidance and then we will take calls related to LTCs remarks. After though, the question-and-answer on our remarks is complete, we will begin the industry-specific portion of today's call followed by a chance for you to ask questions of today's guests. Pam?

Thank you, Wendy. FFO increased 21.1% year-over-year for the first quarter of 2015 to $28.3 million or $0.76 on a fully diluted per share basis. Revenues for the quarter increased 22.6% or $7.1 million year-over-year. The improvement primarily reflects acquisitions, completed development and capital improvement projects, lease amendment, as well as an increase in interest income from mortgage loans resulting from loan origination and the amendment to our Michigan loan. This is partially offset by reduction in revenue from our property sold last December and mortgage loan payoff. First quarter interest expense was $6 million, an increase of $2.2 million over the comparable 2015 due primarily to the sale of senior and secured notes last year, greater utilization of our line of credit, fund investment and development, partially offset by higher capital life interest. General and administrative expenses were $4.3 million or $800,000 higher this quarter compared with a year ago. Approximately $600,000 of this increase is due to increased staffing and other costs associated with more investment activity and the remaining $200,000 is due to the timing of certain expenses. Turning to the balance sheet; during the quarter we purchased a newly constructed 126 beds skilled nursing center in Texas for $16 million, adding it to a master lease of fundamental at an initial incremental cash yield of 8.5%. We also sold a 48 unit assisted living community located in Florida for $1.8 million. Last quarter we took an impairment charge on this property writing it down to the sale price net of selling costs, accordingly no gain or loss was recognized related to the sale of this property. Additionally, we invested $16.6 million in properties under development and capital improvement projects during the first quarter, funded $6.6 million under existing mortgage loans and received $1 million in principal payments and mortgage loan payoff. Subsequent to March 31, we purchased two memory care communities in Kansas totaling 120 units or $25 million. Additionally, we acquired a 16 at memory care community in Kentucky for $14.3 million and originated a $12.3 million mortgage loan secured by two skilled nursing centers in Michigan totaling 216 beds. During the quarter we borrowed $40.5 million under our line of credit to fund investments and development. Subsequent to March 31, we borrowed $37 million on our line and therefore, we currently have borrowings of $198 million outstanding and $402 million available under our revolver. During the quarter we repaid $4.2 million of principal on our senior unsecured notes. Subsequent to March 31, we locked rate under our shelf agreement with Prudential on $37.5 million of senior unsecured notes at 4.15%. These notes will have periodic scheduled principal payments and a 12-year final maturity. We anticipate closing this transaction on around May 20th. During the quarter we received $14.6 million of net proceeds from the sale of 332,619 shares of common stock under our active market offering program. The weighted average sales price net of commission was $44 per share. The proceeds were used to fund our investment and development activities. At the end of the quarter, LTC maintained investment grade metrics with debt-to-annualized normalized EBITDA of 4.4x, a normalized annualized fixed charge coverage ratio of 5.1 times and a debt-to-enterprise value of 26.5%. Additionally, we have one of the most conservative debt maturity ladders in the entire universe with long term debt maturities carefully matched to our free cash flow, thereby virtually eliminating any refinancing risk. In utilizing debt-to-fund investments we have prudently matched our long lived assets with long term debt with 10 to 15 year final maturity. We believe our conservative balance sheet management provides us with the best opportunistic approach to financing our company's future growth and creating long term shareholder value. I'll now turn the call over to Clint.

Thank you, Pam. Good morning everyone and thanks for joining us today. Year-to-date we have completed $63 million of accretive investment. We continue to execute on our investment strategy of deploying capital to acquire newer and more modern assets. The average age of the four properties acquired here to-date in 2016 is two and a half years. During the transactions we closed subsequent to the first quarter were completed with Prestige Healthcare and Anthem. I would like to extend LTCs continued appreciation to both, Mark and Craig for the support of LTC as a trusted capital partner. Currently, when we're working on approximately $150 million of op market transactions, split evenly between skilled nursing and private pay assets, with approximately 90% of the pipeline representing acquisitions. We continue to evaluate selective development opportunities with our existing operating partners and remain disciplined in our underwriting approach or adding these projects to existing master leases for additional credit enhancement. As I have mentioned on previous earnings calls, 2015 we began evaluating opportunities to recycle capital assets, no longer core to our portfolio. Since that time we have sold two properties; one at the end of 2015 and the other during Q1 of 2016 which Pam just mentioned. In 2016 we will continue to work strategically on recycling capital, through selective asset sales to further enhance our portfolio. I will provide updates regarding our capital recycling initiative on subsequent earnings calls. Turning to our portfolio; on a same-store basis for the trailing 12 month period ended Q4 2015 EBITDAR and lease coverage for skilled nursing is 2.19x, assisted living 1.63 times and range of care 1.71 times. EBITDAR coverage after an allocated management fee of 5% of revenue is 1.59 times for skilled nursing, 1.4 times for assisted living and 1.26 times for range of care. Compared with the previous quarter, same-store occupancy remains consistent across all property sites. Occupancy for the trailing 12 month period ended Q4 2015 is as follows; skilled nursing 79.3, assisted living 86.5 and range of care 85.3. Income from our portfolio continues to be well diversified but approximately 52% of our underlying revenue derived from private pay source. Overall coverage in our skilled nursing portfolio decreased five basis points from the previous quarter. LTCs lease coverage metric for this portfolio remains one of the strongest in the industry. This decrease in coverage is mainly attributable to annual rent escalations and challenges specific to skilled nursing properties in our portfolio and not related to any specific shift in reimbursement or managed care penetration. These two properties are included in one of our largest master leases, providing us with a strong credit enhancement support. EBITDAR coverage for this portfolio on a trailing 12 month basis for Q3 2015 was 1.5 times. One of the properties is on CMS's special focus facility list resulting from the death of two residents at the facility caused by the actions of another resident which occurred in mid-2014. The state has denied removal of the license for this facility. However, our operator has filed an appeal which has been pending since licensor expiration date in November 2015. The facility continues to be licensed during the appeal process and although able to admit residence, local media attention has impacted occupancy dropping from 72% on a trailing 12 month basis in Q4 2014 to 58% on trailing 12 month basis Q4 2015. Our net book value for this property is less than $3 million which is approximately $15,000. We continue stay in close contact with LAC to monitor the situation. The other properties performance deterioration is the result of challenges relating to implementation of managed Medicaid in late 2014 within the state where the property is located. The transition caused a temporary reduction in occupancy relating to a specific Medicaid program operated by this facility. Recently our arbor [ph] successfully resolved patient placement issues for this Medicaid waiver program and at the end of March 2016, our occupancy has returned to the same level prior to implementation of the managed Medicaid program, so we believe this issue is now behind us. However, since -- when we reported coverage one quarter in arrears, we anticipate coverage erosion relating to this property will continue for one more quarter. And to conclude in our portfolio, combining coverage and occupancy metrics were 37 assisted living communities leased at Brookdale continues to be strong. For the trailing 12 month period ended Q4 2015, EBITDAR coverage after allocated management fee of 5% of revenues is 1.78 times to the occupancy of 88.2%. Now I'll turn the call to Wendy.

Thank you, Clint and Pam. With the inclusion of our transactions in the first quarter and those completed so far in the second quarter; acquisitions, financings and ATM use, I'm increasing our guidance which $2.95 to $2.99 and raising it to $3.05 to $3.09 for 2016. At the high end, $3.09 represents a 10% growth from the $2.80 we achieved in 2015. And as Clint discussed, we have opportunities to possibly improve upon that. In the current guidance, we have made some assumptions regarding timing of certain asset sales this year but we're not including any assumptions of unannounced additional acquisitions, financings or equity issuance. At this time, I'll ask Dr. Flashner to talk a little bit about Prestige.

Thanks, Wendy. I appreciate the opportunity to be here. I want to thank LTC for their support. Prestige Healthcare, owns and operates 70 facilities in seven states. We focus mostly on skilled nursing but do have a few assisted living and the pennant living. I mean concentration are in the states of Tennessee, Ohio and Michigan; we're currently the second largest provider of skilled nursing in the State of Michigan. We have an office -- our main office is in Louisville, Kentucky, with a satellite office in the suburbs of Detroit. I think what makes Prestige a little unique is that, excuse me, I have clinical background, I was a surgeon by training and our CEO, Bob Norcross, actually started in skilled nursing facility as a certified nurse's aide when he was 16 years old and worked his way up to be an LTN, RN and eventually a Director of Nursing. My background before Prestige Healthcare was in skilled nursing. We expect 1994 when I was the Chief Medical Officer and Director of Managed Care for WinGate Healthcare in Massachusetts, outside of Boston and also as the Director of Development in that company. We grew from four facilities to 22 facilities before I left and formed Prestige and as I said, we now have 70 facilities in seven states.

Thank you. Mark, would you please talk about Anthem?

Sure. Thank you, Wendy and thank you for this opportunity to be here. Anthem was established in 2008. We're office -- our home office is in Lake Oswego Oregon. I have two partners, one of whom has extensive experience in operations of 25 years. One of my other partners has in-depth development experience and my career in real estate development and healthcare dates back to 1980s. We're focused specifically on freestanding memory care, we currently have half a dozen of communities opened with several more in development. We were attracted to memory care largely because we think it is not only a really large and unmet need but it's one that's growing and we felt as though it was an important enough need that we deserved our complete undivided focus. When you say to a family entrust the care of your mother or father to us, that's a pretty heavy moral responsibility. And we felt that the only way we could rise to that level of care was to really make it an undivided emphasis.

Thank you. Craig, what have you done to prepare Prestige for the transition to value-based reimbursement? How are the new reimbursement treatment models such as bundle payments, ACOs, Medicare advantage affecting your business?

Well, we actually started back in 2012 making a conscious decision to prepare ourselves for bundle payments; ACO's etcetera but by way of history, we're really kind of capitated now anyway to back in '94, we've had many, many reimbursement changes over the last 22 years I've been in industry, dating back to 1998 when I know that a lot of the skilled nursing providers and reach took a major hit on their staff because everybody though the world was going to end when PPS came into play. But the reality is that, our view and reimbursement changes most of the time is that there is an event -- there is ways to take advantage of different reimbursement methodologies and usually there is something that's changing that could be to our advantage and the main thing about the change to PPS was it really prepared us for what's going on today. Back before 1998, you were guaranteed a profit, fee for service guaranteed everybody profit but it did fix your margin. So Medicare margins, pre-PPS were actually much lower than they were post-PPS and while I know it bothered everybody and everybody though the world was going to end, we've also realized that, that was a big opportunity. So margins went way, way up, we've had numerous reimbursement changes over the last 20 years, surely with -- obviously, some of the things that have occurred, CMI, Case Mix Index, I don't know how much familiar everybody is with our industry here but Case Mix Index has come into play; cost reports have changed over the years, the way the methodology is -- and we know have quality add-ons in many states, we have some managed Medicaid in space but really while you hear about managed Medicaid, Medicaid is really not managed in any state except New Jersey because the state still set the rates and anybody can participate. So back in 2012, the decision we made was that we needed some geographic concentration and coverage. So we actually divested some facilities and we made a conscious effort to acquire within geographic concentrations. So right now if you leave our office in Louisville, Kentucky and you drive north to Ohio and into the middle portion of Michigan, you can't drive within 90 minutes without being at one of our facilities. We have thirty 35 facilities in Southern Michigan and we cover all the way from eastern part of the state to the western part of the state and we have 19 facilities in Ohio. We think that demographics are definitely in our favor as far as industry goes. And while those bundling going on in ACOs and yes, they will bring the link for stays down and they will try not to use skilled nurses facilities as best they can. I think that the demographics say that total Medicare beneficiaries were 47 million in 2010 and projected to be 64 million in 2020 and that's 35% increase in potential covered lives. So while there will be a compression of days, there is just that many more, obviously, beneficiaries. So I think it was -- it's actually a necessary change because the reality is if you have 17 million Medicare beneficiaries and we're spending the same amount of money per beneficiary, we'll put the country out of business. So that doesn't bother us at all. What we've decided to do as I said is, go geographic concentration. We also are now the preferred provider for six different systems within the state of Michigan. And what we've really focused on myself being a clinician, Bob Norcross, my CEO, he is a clinician, it's high acuity. If you look back over the history of skilled nursing facilities, since I've been in the industry in '94, you'll see the shift from really basically warehousing, elderly, to doing what rehab house school did when I trained in medicine in 1980s which was take care of stroke patients, hips, knees, etcetera and what I think you're going to see going forward is simply us taking over some of the days that are now seeing in the Alpax [ph], select rehab households, etcetera. They are just going to shift down like they always have. So we have the opportunity there. So what we've done as a company actually is, we've become a high acuity provider. We actually own 65% of all the ventilator beds in skilled nursing facilities in the state of Michigan. We're one of only 20 buildings in the country that has hemodialysis and ventilator care in the same building and it's one of the buildings that we actually own with LTC. So what we're seeing is a shift to hire acuity obviously and I know it means worried about this hip-knee replacement program. And it's only really covers about 30% of the country and only 67%, not a big deal and it's a very small volume. But what we're trying to do is position ourselves to be a provider that -- the preferred provider systems just can't ignore. And I think we're being pretty successful at that, one of the Board of a couple of the preferred providers we have managed care contracts with almost every major managed care in the country. And really that's where we've gone.

Thanks, Craig and do you have a view on how big a company you would like to have?

Definitely. I think what's happened over the years is with this shift in acuity, it's become necessary to have staff that can take care of those residents and obviously, those residents surely from a clinical perspective, regional perspective and of course my compliance perspective -- we have a very large compliance department in our company now that didn't even exist years ago. We have Chief Compliance Officer, we have another compliance officer. We do triple checks before we bill etcetera and I know everybody's heard about all the false claims act, claims, etcetera, etcetera. And really, you know -- everybody makes on that audit but in theory, if you're billing appropriately, it doesn't matter if you have a rack audit. You didn't go for anything you wanted to cut the bill for, so we've done fine rack audits. But I think that what we found is that we've been too sweet spots between 90 and 120 facilities and you've seen a lot of the actual. public companies including Kenjwins [ph] and some of the other ones carry down from 300 to 350, down to that level. We were involved in Extended Care transaction as one of the operators and Extended Care had 370 facilities approximately 160 in United States, they sold 160 in United States and kept their portfolio in Canada which gives them into that range. So I think that you're seeing a lot of the bigger companies come down to that level as well.

Thank you, Mark, would you talk a bit about how you and your team select markets and how you feel about over supply currently or do you over supply in your areas?

Well, there is the risk of oversupply. But first of all, let me address your first question about how we select markets. We're very focused on doing in depth market studies and we wouldn't, for instance, few markets like Denver as a market, but in fact when we research that market's starting 6, 7 years ago we honeycombed it into probably 25 to 30 submarkets and that's really the way we believe we have to look at any major metropolitan area because there are supply and need issues in every quadrant of the city and that will vary pretty dramatically. So we do, we start with in-depth in-house study to look first at the population demographic the current supply on the ground and calculate what we believe is an unmet need income adjusted for private pay. And if that looks strong enough, then and we find a site in that quadrant of the town or the city that we like. We will then refer our study into an out of ours third party to validate what we have done just to make sure that we're not drinking our own kool aid and then if it sufficiently strong, we will move forward in and acquiring a site. We really believe that in depth market study and research too validate the need is an absolute inviolate first step in any kind of an acquisition or development and so far that has been good for us and we certainly intend to continue in that light manner. In some of the markets that we're in, we're seeing presence in Denver, there is a continuing supply coming into the market which is a bit surprising because well, I think that we're now pretty close to balance, you could get out of balance with some of the at least rumor development that's coming, continuing to come. What we anticipate doing is really focusing on our core strengths which is strong market brand awareness reaching out to hospitals conducting community events and really being recognized in the market as a specialist and an expert in providing top [indiscernible] memory care and that is not to say for a moment that we're not concerned about competition, you always have to be, but we will be the one still standing because that is our business and that's what we're committed to.

Great, thank you. Thank you to both of you. I'll now turn the call over to questions from the audience.

Sure. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rich Anderson with Mizuho Securities. Please go ahead.

Thanks. Congratulations on a good quarter. Pam, can you just tell me what the ATM activity was again for the first quarter, I missed that.

Sure. It was -- we received proceeds of $14.6 million from the sale of 332,619 shares and that was a net price of $44 per share.

Okay, thank you very much. I know we never going got this fully answered but looking at your skilled coverage on the EBITDAR basis of 1.59 times and in that is the Prestige loan which was originally call it two-ish, now maybe a bit lower but are we thinking about that right, like in terms of the rest of the portfolio that's not in a loan format? Would it be significantly below 1.59 just -- the weighted average kind of math or how should we think about the real estate coverage -- and the coverage for the real estate that you actually own?

Sure Rich, this is Clint, good question. One thing regarding the loan of Prestige, that needs to be looked at, it's a 30-year mortgage. So it has -- it embodies a lot of elements of the lease or lease sell. It's obviously a long term investment for us. Coverage, as we deployed additional capital on that loan, as we mentioned in the last quarter; the coverage has come down a little bit which we expected would be the funding of that incremental payment as interest is going up on that but the coverage right now for the portfolio -- we took out the Prestige, although we had around 1.5 times coverage within the portfolio, on the skilled portfolio.

Okay, so 1.5 excluding Prestige?

That's correct.

Okay, thank you for that. And then when the -- last we spoke which wasn't long ago, it didn't sound like the acquisition pipeline was going to be as fruitful this year as it was last year for you, just in terms of volume of opportunities. But now you -- it's fairly significant increase in guidance based on that and some sense that you might do some more as the year progresses. Would you say that there has been a change there and that suddenly things are starting to percolate more in the last month or so?

Yes, we've had significant success in converting some of the things that we thought were going to be in the pipeline and moved it to the pipeline level where we have an actual LLI. Whether they transition into an actual transaction, I don't predict at this point but yes, it's looking much better for this year than it did the first quarter.

Let me give me some color on that. These are all off market transaction that we've been able to source through our relationship. So in general I would say that marketed activity has probably come down a little bit, but again, these are all off-market which we use our relationships and contacts to throw out that pipeline we have today.

Would you going to put a dollar figure on this off-market opportunity pipeline?

I provided it in my prepared remarks as $170 million in total.

Okay, so I missed that. All right, thank you.

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

Hi, good morning. Just in terms of the 305 to 309 that you just provided, I might have missed this in terms of what you said about this, kind of the balance sheet side of things. So am I right that there is probably around $200 million or so on the line after your April transactions? And if that's about right, is the 305/309 number that just stays on there or is there a kind of terming out or equitisation component to the numbers?

It assumes it's on the line and so the line is not termed out in our assumption.

Okay. And I mean, how do you feel generally about the balance? I mean it's a little bit higher than kind of what you've carried typically in the past? I mean, you've given thoughts over the past few quarters about where you want your leverage to be and then maybe kind of in particular about where you'd want the line balance to be, is there any kind of additional color there now?

Well we're at $400 million of availability and $200 million drawn on the line, we're comfortable with the line balance. But we will remain opportunistic. You saw us pull down on our pre-shelf because the rate that we were offered was a great rate for LTC, spreads have come in from where they were the last time we talked, I think at the beginning of the year. We were very cautious on possibly terming out the line because not only were rates higher, the spreads were considerably higher than they have been historically as a 10-year crept down and spreads were persistently wide. We did not term out the line and recently in the past two weeks I would say, spreads have come in significantly, so we took advantage of that. And that's really how we run the balance sheet as to be opportunistic. So if spreads don't remain low and rates don't move out, we possibly could term out more later this year, if rates remain low, where they are right now.

Okay, that's helpful, thanks. And then, I think last quarter you talked about kind of looking for some shift in pricing in terms of investments and obviously, all the stocks are in better shape and when as you look at your pipeline now whether kind of any of that improvement in cap rates from your perspective is materializing in what you're looking at or whether kind of that's a less of an urgent focus now and it's more to sort of exploring opportunities with -- kind of organically with your partners at kind of cap rates that might be consistent with where you've been in the past?

Sure. Since these are off-market transactions, we haven't had the cap rates and evaluations work for us on these transactions. But we have seen slowdowns as I mentioned previously, just deal activity in general. So that could be some price discovery, we're drawing buyers and sellers in the marketplace, given that we've seen a lesser amount of that activity from our brokers.

Okay. And then just lastly, anything new on the behavior old, your side -- your sort of initiative to explore more investments there?

So we're still interested, we're having conversations and continue to explore the space and so that we do want to continue to pursue, we're going to do it slowly and methodically and investing in the space. So it's something we very much continue to be interested in pursuing.

I mean you think we could see something this year in that semi-base what you're looking at now?

I mean, we're having some discussions, it's possible that we could see something later in the year, it's correct. But that's not in our pipeline right now but there is something that, I mean -- later whenever it's possible to materialize.

Okay, great. Thanks.

But again, it would be probably a single investment and we're going to approach this now methodical and strategic basis and not getting ahead of ourselves. So it would be a small investment should we be able to do that.

Okay. All right, thanks.

Our next question comes from Jordan Sadler with KeyBanc. Please go ahead.

Thanks, good morning. Did you characterize, Clint, the pipeline in terms of property versus loan opportunity?

90% was acquisition.

90% is property, Okay.

Asking, no, is it one development and the other acquisition or is it one development, one loan?

There is one development project that we'll not be allowed, that would be -- we failed that balance sheet.

What Jordan was asking was -- I think was acquisition or development?

Acquisitions or development, I'm sorry. So on development right now, we have 9% of the pipeline that would be development.

But none of the 150 is loans?

A small amount of fees, that would be 2% of the -- so very small.

Okay, 2%, small, okay. And then, in terms of obviously, you used the ATM during the quarter. One, I'm curious, sort of the appetite there or if that seems to be the most efficient means to sort of raise capital relative to sort of this acquisition pipeline if you think you'd continue to use the ATM here. And two, I didn't catch what the year-end leverage would look like if you sort of model that out from here based on -- what's embedded in your guidance?

Our year-end leverage would be, if you used $47 a share, it would be approximately $28.72 debt-to-equity. So we can -- we'll still without assuming any additional ATM shares. So we still be below our 30% average target.

Do you have a debt-to-EBITDA number for that?

it would be under 5 times.

And that -- and the range there, you want to continue to remain below 5 times or is it 4 to 5 times?

We're comfortable at 5 times.

But not below? I mean not above, rather?

I mean a little bit above, it's certainly not upto six. I know some of our peers run it six but I think that's a little high for us considering we tend to be more conservative.

Okay. And the ATM, the only question there was just you did 337,000 shares during the quarter. Post quarter was how much?

We have actually stopped when we -- we're in a blackout period, so we haven't started using the ATM. If we do this quarter, we haven't started. And indeed if we do, that $150 million of acquisitions, it's not, it's cheaper to use the ATM but it's not as efficient. So we certainly would be looking at different ways of financing if we do all the $150 million.

Okay, thanks for the color.

You're welcome.

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

Good morning. This is Seth [ph] doing for Chad. How are you guys?

Fine, Seth.

First question, just on the updated guidance and more specifically on G&A as you've added more headcount, what should we be assuming for sort of a quarter run rate for the remaining of the year?

About $4.2 million a quarter.

Okay, so whatever came in this quarter?

Yes, I think we're at $4.3 million this quarter or $4.2 million. I mean we had some timing things, first quarter G&A is always a little bit higher. But I think $4.1 million to $4.2 million is probably good for the rest of the year.

All right, great. And then, the skilled nursing lease coverage I think should stick down for a few quarters consecutively now and I don't think you guys are upto this onto isolated incidence with properties but do you have any view on how that coverage -- should we assume this trend persist going in the 1Q or any updated thoughts there?

It was mentioned in my comments that the one building we may see some steerage on that one building for one more quarter but right now when looking at what we see, we think that is -- should stabilize where we're at right now.

All right.

And if we continue to buy property, can we underwrite at 1.5 coverage. You would naturally expect the average to trend down as you're adding properties in at 1.5 whereas the legacy portfolio is a little higher than that.

Right. And then I guess in the current environment, I've been looking at cap rates, where do you guys see the best investment opportunities and do you think you'll see any behavioral health growth opportunity going forward?

We already gave it, we talked about that in lot of the previous comments that we have been in discussion with somebody and we're looking at a potential opportunity. So it's likely we'll see something on the behavioral health. Regarding the best opportunities for us, really it's us being proactive. We first assumed in front of operating companies, we just try to source off-market transactions because there is some price discovery disconnect on the acquisition side whether it's skilled nursing or assisted living. So it's really trying to find unique off-market opportunities and position ourselves with strong relationships with our existing operating partner, continue growing relationships with our existing operating partners and forming new relationships. So that's what our pipeline represents and where we're spending our time trying to source investment opportunities.

All right, great color. Thanks.

Thank you.

[Operator Instructions]. And our first question comes from Michael Carroll with RBC Capital Markets. Please go ahead.

My first question is to Craig regarding the RAC audits. How many audits are actually taking place in your portfolio right now, are they just started or you receiving more I guess the letters or is there anybody actually doing the information search?

We fund the RAC audits for this recent period of time. So there's not a lot of RAC audits is going on right now. The last what we have is in 14. So we’re not seeing a lot of activity ourselves.

So then I guess, kind of the audits actually started with the announcement that occurred in March?

We didn't know, we haven't seen any activity since then.

Okay. And then I guess you said you participated in the BPCI [ph] starting in 2012, I mean what model did you participate in?

We didn’t participate in a specific model, but we're preferred provider for a lot of our systems, we actually have supplied the systems with information that they're using to determine how they're going to bundle and how they're going to contract. So we have two systems that we’re jointly supplying information to and working with and I'm actually asking the question of us. They're not part of the bundle yet.

Okay, you're actually participating with the hospital systems that are in the bundle, but you yourself are not in one of the bundle program.

That's correct. They're bundling with mix shift.

And have you noticed any changes from those operators as you participate the bundle, are they sending more patients to you as you participate in it?

Well on the Board of both of those and we obviously prefer provided for that for years now, so we haven't really seen any increased activity, but we have large activity with them. I would think, what's really going to happen, I will address this. So what most people believe that I was meeting with Mark Parkinson recently at our annual meeting and Mark is the President of the AHCA which is the American Health Care Association which represents all of the NIS throughout the country and Mark I had this conversation and what's really going to happen, we believe him and I, is that anybody, certain companies and once again, the reason I said this size, it becomes an issue as well. Certain companies is just going to be preferred providers and other companies are going to get shut out. So if I was making a recommendation to LTC already healthcare REIT that is in our space. I would tell them, make sure that they're picking the providers that are going to be in this space, that are going to be preferred providers for these guys because all of those are happen as we will see increased volume, there's no doubt. I mean we're preferred provider with McClaren on the Board, same with Saint John [ph] etcetera. So we know the McClaren is going to keep us in their system and McClaren is going to knock out probably a third of the facilities that are in the system today. And those are going to be the small mom and pops the ones that just can't handle acuity, the ones that don't have the geographic coverage and all the things that I talked about earlier as to why we set that upside in 2012. So we believe that the actual number of days, the covered lives are projected to go up, the number of [indiscernible] days are actually projected to go up even with the bundling, even with the ACOs, but what we believe is that there will be a smaller number of providers, that will be sharing in those days.

Our next question is from Rich Anderson with Mizuho Securities.

So from your business perspective. I think we get the message. But as someone who sees what's going on outside of your specific lines of business and what would you say that the fall off will be and I don't know exactly how to ask this question, but is there some stuff that needed -- some companies that needed to be addressed in terms of how they were going about their practices, their Medicare billing or whatever and do you have any opinion about that, about your competition and how it'll play out over the long term?

Yes, if you're referring to some of the company is a little bit of trouble recently.

And maybe more that haven't been yet, but may from your perspective, the natural names of course but, I'm just curious if this is truly a long term positive, may be it is for you, but is it for the industry and that's--

Well, I think it's positive for the industry. If you're asking me a few things if I can bundling and if I think that ACO is positive for the industry. It's not an issue to me if whether it's positive and negative, is it necessary a place to go. We provide healthcare, I know you guys like lend money to buildings and say -- you would add into our space, but the reality is that, that it's necessary to control the overall cost and I think everybody are so worry about just pulling money out of system, but this putting more money in the system, not money pulled out of system. ASCA published something recently, in 2010, there were 82 million snf days -- Medicare snf days. In 2020, is projected to be at least 96 million, maybe as high 105 million. So you're talking about anywhere from 6% to a 14% increase in actual snf days. If we kept paying the same amount of money, well, we didn't get efficient, we'll put everybody out of business. So it doesn't bother us from a whole industry perspective, anybody that's bothered is just going to get out of the industry and also the smaller guys that can negotiate and don't have some leverage and don't understand and also [indiscernible] has two. The vendors in our space on that oblivious to what's going on at pharmacies. I have joined in the other night with the President of Omnicare Pharmacy, it's owned by CVS. And Rock you understand, if he knows that he has going to come down by 8% to 10% to make up its difference, the rehab providers know that, the DME providers know that and that's what we saw happen back in 1998. Before 1998, when I joined in OneGate Healthcare in '94, they were totally clueless on what their costs were. They said, go catch a little managed care, it's your position, go catch a little managed care companies, I said that’s great. How much does it cost you to supply services per resident per day, we have no idea. Well, how much I'm supposed to ask the managed care contract or contractor to pay us. So we have to figure all that out, that wasn't a bad thing that was a good thing that was a necessary thing. So I thought -- our industry is not going anywhere guys, people are getting old, there's a lot more of them and they're going to be Healthcare and you can't do it at home and what's going to happen is just keep shifting downhill and we're focusing on some space and other guys are two other big companies like ourselves are mid-sized companies, these are focused on high acuity for a reason. It gives us pricing power. When we take a ventilator patient from a managed care company that's non-dialysis, new -dialysis, I tell them how much they are going to pay us. They don't tell me how much they're going to pay, because they're sitting there in a hospital $1,600 bucks a day to $2,200 and I know there. Knowledge is valuable, knowledge is powerful, I know how much it cost for that, I think all of our private managed care contracting back in 1994 before anybody else was doing it. I know the paying $2200 to the hospital and I tell them I take them for $1000. And I know that works for me. So you are not going to make the same, obviously margin every resident or you have the right population within, you can lose couple of hours here and make a lot more there. So I think a lot of these companies, they will be fine. everybody is going to be fine in this industry, it's not going anywhere.

What percentage of your Medicare business is orthopedic?

Not that high. I would, [indiscernible] I knew the question would come up about 3% on knees and hips. Yes, think of it this way. So my CEO just had both these new replacement last year and a half, even this 50s. But let's say you are 68-year-old person and a buddy of mine is about 58, he just had his knee replaced. It didn't go to skilled nursing facility. So all the hips and knees of 68 or 72 year old or 75 year old, that guys are in our building was about 80 plus and really 85 plus. So those of much more medically complex individuals, also guys that have had congestive heart failure, respiratory problems, emphysema. We have a big problem now in this country, obviously with obesity and we have 400 pound residents. The younger pay population was the ones that are killing themselves and they are the big obese diabetic patients. The orthopedic [ph] patients that we see in skilled nursing facility are really just the elderly patients who can't go home right away or can't do outpatient rehab and either come to our facilities. That's not going to change, because medicine will change, obviously technology changes, but in general that's not going to change.

As there any place in your portfolio, where you have even just a little bit of concern that you're not connected properly with through relationships or what have you, that you might be one of those that will fall by the wayside as hospitals kind of small down their relationships?

Yes, that's a serious concern, but we've put a huge focus on that, we're making sure that we're in your human is of the world and the others who will. The other thing is a consolidation right now going on within the managed care industry. Aetna, Humana all those guys, they are merging too. So there is going to be few of them, we're in all those networks. So would you worry about it, there is also a difference remember, there is a lot of areas in this country still that really don't have high managed care penetration. We have buildings in rural areas, we've buildings in urban areas and we've buildings in suburbs of urban areas. We love the suburbs, because we like to network, but in rural areas really there is such low managed care penetration that they don't really have a lot of choice. In a lot of markets and skilled nursing facilities, Europe, you and one other person [indiscernible]. If you look around in Wisconsin there is also one of the person, if you look at Tennessee there is also one of the person, that patient population really isn't just all signing up for managed care because this is not that kind of penetration. So it's really kind of a mixed bag. And we like to own everything, we like to own rural, we like to own urban, we like to own suburban for that exact reason. And you can answer about and that's why I think that the companies that we're going to do okay at the once it owns 70, 90 and 120 buildings. Because you're right, you make a great point. If you can be an all-in phenomena, if you own 5-4 facilities and you're in one market, it's very risky you don't get any managed care if you’re from Massachusetts, and you don’t get in Harvard Pilgrim and Tufts, you’re out of business. So we're spreading our risk, you get hit right on the head as a great question. But that's why 90 to 120 makes sense, because if we can pop out of Tennessee, but we're finding Michigan, Ohio we’re fine, it's the same reason that we believe that we need that many facilities and we need to be in these three or four states, because over the years certain states economically are in trouble when Tennessee was heartened during the recession, they did is that okay. We'll look at your cost reports and if you're going to go up, your duration to go up $10, they will give you 20% increase on the upside, if it's can go down and they will give you 100% decrease on the downside. So we got our incentive for a few years, we've got huge rate increases this July 01. Same with Ohio, Ohio rates went down about Medicaid now. Ohio rates have gone down, we just got a big bump effective this July 01 again. So that's why I think it's important and also to be in multiple states and that one place. That was a good question.

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

Maybe it is for both, so we could maybe start on the income side, there's been a lot of focus on labor costs and the kind of the impact of competition for new developments or higher minimum wages, I'm just kind of curious how your organizations are addressing that challenge, whether it be kind of retention initiatives are staffing changes or if comp structure, how the impact just been on your margins?

Well, our biggest concern to start with is finding a well-qualified caregivers and while we have seen some upward pressure on wages, it's really not been at least to date, much more than just inflationary type pressure, pretty manageable, 2% to 3%, but the bigger concern is really finding and hiring and then training and retaining good health. And so we're -- that is really our number one focus in 2016 is designing an entire program with just a lot of emphasis around recruitment and training and retention and implementing a bonus program. So yes, care giving or hiring and retaining good caregivers is probably our biggest single challenge.

Mark, there is a recognized cost of turnover. So as the salary level go up, if you can reduce turnover, you're still going to be better off.

Well, that's exactly right and that's why it's really important in the whole process of analysis to make sure that you're hiring the right person to begin with, because if you raise your wages dramatically, but you didn't hire the right person, you're still going lose them, they're just not well suited for the job. So what we realized is to balance out not only the optimization of quality care and keeping it affordable, we need to do a better job of identifying the right person, then on boarding them correctly so that they really understand their job, they don't become a demoralized, because we've loaded them up with so much information that they can't processes it and then work to retain them. And you're absolutely right Wendy, as our turnover costs come down, we can actually reinvest that in higher wages.

I mean, Mark hit right on the head. I think our number one concern is employee retention, our number one program that we've got -- that we've implemented from the last year or year and a half is how to retain our quality employees. When we took over the 33 facilities that we took over out of the extended care portfolio, we actually went through myself and my CEO and we implemented actually wage increases in 23 old facilities, because we just did not -- we just do market studies and we make sure that we're under paying people, that's really one of the major comm. When your $12 an hour employee and building up the streets as I pay $12.10, even if you love that building you tempted to go, so we constantly are looking at that. And you're right Wendy, there is a huge cost to employee turnover, not just in dollars and cents, but really in quality and care. And our main concern and our industry at least on the skilled side, it's really a quality of care. Because I don't care how well you can market a program if you're not a quality care. The preferred providers are going to know, the hospitals know, the community knows and you'll never keep your buildings occupied and never keeps that.

And then just a comment on kind of new development and I think Mark, maybe you're referring to Denver in terms of the level of competition from new projects with sort of was balanced and then maybe now it could be headed towards sort of more of a lack of balance. I mean, has it affected the kind of the lease up of your later stage projects in that market is a kind of change at all the way you think about entering new markets and kind of the role of barriers to entry or kind of the way you just kind of think about your geographic expansion?

Yes, I think it's fair to say that in Denver, it's always concerned when you see announcements of new development. So we would never take that of anything other than seriously. We believe that we probably have four communities in Denver. The one community that had a bit of a stall out for a short period of time. In January and February, I believe and we'll never know the exact amount, but we had a really horrible car accident happened on New Year's Eve. Even though we sit back from the street about 100 feet, believe it or not a car about 60 miles an hour came jumping over the curve and slamming into the front of the building and thank the good lord we didn't lose anybody. It took out the entire conference room which three or four people had just moments before left. So we were celebrating the fact there was no loss of life, but on the other hand, when you have the Frontier building completely under reconstruction that obviously has an impact on your lease up. That property which is Greenwich in Westminster is now back on track, we're seeing good lease-up activity as I said, we had some quiet periods in January and February. How much of that was related to the reconstruction, I don't know for sure, but I suspect a fair amount of it was tied to that. Our buildings overall in Denver are doing very well. I certainly would never be complacent, we worked diligently every day to market ourselves as one individual in the Colorado market, it was a marketing specialist had said what we take as a complement anthem has been able to establish strong brand identity in the Denver market. We're not real big, but we do have four communities that surround the Denver market. Yes, I understandably concerned when I hear about additional announcements of -- I don't know if we're at the peak and we're just now going to see it start to subside. I know that when I was at NECC [ph] conference earlier this year, it appeared that overall the development maybe hitting kind of cresting point and that we may now be seeing things starting to equalize. We're focusing on a go-forward basis on entering markets where there are higher barriers to entry, one of the other comments has been about the Chicago market and how -- and that's where we're also really active. But the way the Chicago market is defined and the way we define it are quite different. When I look at some maps that define the Chicago market, it takes in a very large proportion of Illinois out and including some pretty substantial farming areas which wouldn't stick me is being Chicago. That in my opinion is where you're seeing a fair amount of development in the Chicago market. We tend to be close-in in higher barriers to entry markets like Huber Ridge, Tinley Park, Lincoln Wood, Oakland where frankly finding sites are really, really difficult to come across. So while that's not any guarantee that we won't face competition, it does at least or tend to minimize it.

Our next question is from Karin Ford with MUFG. Please go ahead.

What are your return hurdles today and what type of same-store NOI growth are you underwriting when you're looking at new deals?

Are you asking the operators when they're looking at new deals or LTC?

Yes, operators.

Operators, if you're looking to add a facility to your portfolio, what type of returns are you looking for?

Well, that's kind of a loaded question to my industry, because of the complexity of some of the programs in the buildings and some the operators we acquire from, we try not to do turnaround buildings that need clinical turnaround, they have clinical issues, but surely buildings that have economic issues, we will try and turnaround if we think we can do something different than the operator, especially in a state like Michigan, where we understand cost reports very, very well. But to answer your question in a specific multiple, our ultimate goal is to be in a facility for a five to five and half multiple of EBITDA when we're done with what we're doing and that might include a renovation, that might include a bit of a turnaround or whatever. But we try and get into our buildings for around five multiples when we're done.

In our case, this is Mark speaking for Anthem, the way we tend to evaluate markets is primarily driven by lease coverage and bottom line, net operating income. We strive to have a debt coverage somewhere in north of 1.3 range. We want to make sure that we genuinely believe that we can have a net operating income before taxes in that 9% to 11% range. And as long as we can meet those two tasks we feel pretty comfortable.

What are your capital alternatives to the REIT today and do you see value in doing repeat deals with one capital provider?

Sure. I mean, obviously it's advantageous to do multiple deals with one capital provider. I think the most important thing from our perspective is to be with a capital provided who understands our industry, when you're in the skilled nursing facility industry there is a lot of nuances and helps that provide, if, what if your capital partner understands that. I'll turn to the REIT, there is many banks out there that are lending to skilled nursing facilities today and we do so obviously with banks as well as with various REITs.

And is there any change in appetite from the banks, I'm sorry?

Is there a change in appetite? I'd say right now the appetite is reasonably high, but it changes constantly as, I mean if I called up even so my lenders, I've done eight deals with back in 2010, I probably couldn't have got a loan and they don't take it personally. I just think no body was really lending and some of your tie on the callers and the lenders ideal. So I think that right now the appetite is reasonably high. I think the hard thing right now for us it is to find deals that make sense. We're very particular, to the last thing we want to do is buy something that isn't really additive, as you, as we talked about earlier or we can't get to that 5, 5.5 multiple eventually. So I think our hardest, the toughest thing now is finally do it make sense. I think if we find a deal in our space that makes economic sense, there's lots of lenders that are interested.

From our standpoint we really appreciate and value the relationship we have with LTC and we think that for us in particular at this stage we're in, a repetitive ongoing long term relationship with the trusted capital partners such as LTC is really optimum and the reason being what's unique for us in our relationship with LTC is not only its size which is large enough to be financially robust for our needs, but not so big that we have to deal with multiple levels of management and it's not difficult to get transaction put together and that as we all know in active and growing market being able to analyze and complete transactions in a fast way, I say fast and no transactions ever fast, fast, but in a way that is very straightforward and repetitive where you have your documents agreed to, is I think a strategic advantage for us and because we see the business as an operating business, not a real estate business, it's all about care, we're focused on creating good buildings, but we're not creating them from the standpoint of seeing it as a capital transaction on the real estate side for a future capital event.

It's an interesting question Karin because, I recall, one of our first meetings with Mark and I stick in this conference room. When we were talking about Anthem and starting to build memory care properties and we were so impressed with their focus on the care they already developed a prototype, just looking at numbers which was the pro forma of what they industry could be doing an Anthem in particular I told Mark, I said, there is going to come a time in your development if this happens when people are going to be throwing money at you like crazy and we understand that we do not finance with one type of financing vehicle Craig has more properties than are financed by us. We expect that some time Anthem it's appropriate for Anthem maybe to finance in a different way, whether it's to get debt to own their own properties or something but one of the things that we have with our operators is an understanding of their health is our health. And so if it makes sense for a different capital structure for our operators we're all in support of this

One of the things that Mark talked about, this relationship we have is really being able to free up your time just focus on development opportunities construction operations and not worry about sourcing capital which give you very time consuming process, but it's also taken off to recap risk in the portfolio as if we had pursued joint venture relationship, there's always that monetization recap event and that's off the table as we provided prominent financing to Anthem that really allows them gives more vehicle they have a business that's ongoing under lease structure where they can invest in their dollars into human capital, technology really to grow their operating business.

And just last one for me, there's been some variation over the years of escalator rates in post skilled nursing and assisted living leases. Do you guys have a view on what the right escalator level is for your business when you partner with a capital provider?

We have actually been doing fixed rates for the first four or five years and our acquisitions, getting to your point that as we're trying to implement new programs and do some turnarounds or do some capital improvements in these buildings right now in a portfolio that work we did with LTC back in 2013, we're doing $30 million worth of renovations construction. So and it's still 2.5 years since, so the first four or five years, we've actually done fixed rates and then we've escalated from there, but obviously we can handle at 1.5% - 2% bump increase, but when it starts getting -- I think our increase is about 2.25% when it gets above that it starts really getting out of hand over time. So we've kept those down to 2.25% or 2%. Well, speaking for anthem, of course the flatter is they increase the better. It's always, certainly understandable from our reach standpoint if they want to need some kind of an annual adjustment, I think the million dollar question is how do you match that up with inflation expectations. Clearly, if inflation were to remain really flat, at some point, we might have some real upward pressure on our lease rate. I think we're all expecting that at some point we're going to see some greater increase in inflation than we maybe have in the past five or six years, but we're comfortable with the 2% to 2.25% and as long as we have reasonable annual adjustments in our increase in inflation, we should be able to sustain that.

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

My first question maybe for Dr. Flashner, but I was wondering if your company participate in home health and you see a cost advantage of home health versus Smith for certain episode?

That's one of space we stayed out of. Actually in my former company when I was with OneGate [ph] we did start a home health agency, but we've decided to really holding its focus on what we do best and really what we do best is to provide skilled nursing care. That's why we haven't really thought a lot of assisted living and let independent. We bought independent assisted when it's kind of come along with our sniff acquisitions, but we don't independent finally go out and source those and try and acquire those. So to answer to your question, we're not going to do home health, we're going to stay focused on what we're doing to try and grow that. Do I think the some of our days are going down to home health, absolutely I do, but I think some of our days -- some of the days as I mentioned earlier from LTACs and rehab hospitals are coming down to us. There is a finite amount of clinical care that can occur in someone's home. know everybody is really worried about home health taking over the world. Never going to happen. It just isn't going to happen, because it's really not an efficient delivery system or model for true high acuity individuals. It's great, if you need six hours [indiscernible] watch your mom or dad was 85 and has some dementia issues or whatever, because you can hire somebody in at 12 bucks an hour. And we talked about this earlier too, the cost of a lower end home health et cetera is going up and if guys keep talking about raising minimum wage to $15 an hour, that's going to real issue for them, no doubt it's issue for us as well. But it's not an efficient delivery model, it's not going to be a model that's really going to be taking care of high acuity resin. So we're not too worried about it is, because we're focusing on the high acuity side.

And then my second question is on the star ratings by CMS, do these rating matter to you? Do you think--

Yes, they matter. Well, they were really matter to me, but they matter to everybody else, so they do. The star rating change almost weekly now for us, it's been ridiculous. They're adding five new categories that they're looking at and a lot of our buildings -- we have building that let for five-star down the three-star in the last change and then they changed them again and now they are changing them again, it matters only because the managed care companies as saying it matters and a lot of the managed care companies are saying, if you don't have a three-star building, we won't contract with you. So it's a big focus of ours and all things side, we're definitely focused on it. We break it down as to what we need to do, building-by-building to maintain stars, we're above the three-star as a company, most our buildings or above three-stars or above, so we don't have an issue with that, you can't contract with the BAE unless you're a three-star now. So it is something to focus on that as an issue, but it's hard for the industry, because the government keeps changing what they're measuring and every time they make a change, nobody really knows what the effects going to be until you run your five-star the next day and then you see if you're going up or down or other around. So it's harder for everybody, yes, but it is important.

So for your one and two-star facility, is this just a matter of increased capital or some facilities one that you made just dollar?

No, usually Dan, it's really about, when we take over facilities, we'll take over a number of one and two-stars and it's usually the quality measures and it's usually they're surveys that they had their healthcare surveys done with states that CMS does their annual surveys. And the reason I think a little bit of time to raise them up is we have the next survey to drop off, so you have to have another annual survey and have the last one drop off and sometimes it might take two good annual survey view to really give them up to where you want to go. So it can be a two to three-year process, if you take over one star buildings.

Our next question comes from Jordan Sadler with KeyBanc. Please go ahead.

Just a follow-up on the CMS star ratings, as a clarification, are you saying it's like in the end of the answer there you were giving that it does take some time to move a CMS star rating on your portfolio, especially on 1 or 2. But in general, across a portfolio, you said something about your CMS star ratings moving up and down. Are they more, very gradual to move, how long does it take to move a star rating on an individual facility level?

Well, what's happened is, they've changed what they're actually looking at the measure to determine how many stars you have. So if they say one day, okay, we're now going to look at your company antidepressant using our anti-psychotics in your building, but they weren't using that in the star rating before, you don't know where you're going to fall until you look at all your anti-psychotics in your buildings and see if that's going to help your star ratings or hurt your star ratings, so what they have done in the last couple of years is added in many new categories like that. Sometimes the answer is a little complex, but sometimes you can move the building quickly. Let's say for example that one of the measurements is use your staffing. So if you have a building that doesn't have a lot of RMs [ph] and its well below the average new area. If you go on higher bunch of RMs you can move that up fairly quickly. If you have a facility that had a major clinical issue on its annual survey and got a bunch of high level acuity tags, [indiscernible] then it's going to take a while to move that because you've got to have that survey drop-off and that takes a year. So the answer is, it could be anywhere from a quicker effects to a longer term effects, it just depends on the building.

And as it relates to, when you talks of the hospitals now so that you sit on the on the Board. What are they focused on, I mean are they focused on the star ratings, are they focused on re-admission rates or are there any hot-button that sort of basically affect. How you are managing your portfolio?

Yes, I think they understand that the star ratings and at the end of the world, one way or the other because of the variation and fluctuation but they're definitely focused on re-admissions. I can tell you that for sure, because re-admissions are costly to them, that's probably one of the best, definitely one of the main focuses. And it is contract and bundle they are going to be focused on how much is really going to cost for you to take care of these particular DRGs. So when they're discharged, I mean, because they are DRG system and we were not one [indiscernible] but we're kind of going to go to the DRGs system obviously which is fine because what they're going to say okay, we're getting paid acts and we've got to move him down to here, move him down to here. And they're going to try and skip the next level of acuity obviously as best they can, so they are focused on that, for sure, but here is the other thing that is there is a finite dollar cost to take care of somebody's skilled nursing facility. I don't care if you give the best provider in the world, but you are not hiring an physical therapist practice of therapist from much different cost than anybody else in the marketplace. So if a resident, if a patient comes in, they really need two hours of therapy, it's going to cost just $60 an hour to do it. It doesn't matter who you are. So there what will happen is, you'll probably see I won't this as far as are going to see what happened back in the early days of contracting where a lot of providers took contracts on for rates that made no sense whatsoever. We just set back and say that we'll let them go out of business and that will pick up the debris. So what will happen is so on a contract or something that makes no sense I have it, because they don't understand what that is and then they will be able to do it and there won't be a provider for that hospitals system very long.

And then one other, I mean you talked about folks who might lose share going forward and moms and pops are often referred to. But at the same time you talking about a sweet spot in terms of sizing in the 90 to 120 facilities. So I am kind of curious who loses more share is it the moms and pops out there who may or may not be more versatile or have the ability to sort of like changed or is it the large corporates?

Well, I think mom and pops are gone. You will not be able to be in a network if your mom and pop, if you have two buildings I just don't think that a hospital system it's bundling or a managed care company is going to want to go through the brain damage of contract with somebody that can only supply such a specific net. Unless you're in the world markets as we talked about earlier, you're the only game in town. They can survive, but I'm talking now in the more urban, suburban settings. I just don't think a mom and pops valuable any long that have one, two or three buildings are pretty much as the business.

Speaking from memory care. I think that there is an advantage to having a multiple properties certainly and in large part due to the whole concept of bringing training and care model to its fullest potential which if you only have a very small number of one, two, three properties that's pretty difficult to achieve. However, at least from my vantage point, I don't see that in our segment of the healthcare industry that it's necessary to have to be really big. We would certainly feel as though, given a goal of 25 to 50 properties that will be a niche, that will be really effective for us will be big enough to be able to afford all of the professional staffing at the home office that we need for recruiting, for training, clinical care, etcetera. And I would think and this is just speculation on my part, but I would agree with Craig, I think that when you start to get about a 100 properties, it's going to be come pretty unwieldy but I certainly wouldn't want to be see us get to that 50-ish range and I think that will be highly efficient. Even now at closing in on 10 properties, we're starting to see some additional need for corporate staff that which is going to be a little bit rich for us it only 10 properties it will be a lot more comfortable when we're at 15 or 20, but we certainly don't see the need to be huge in order to be highly competitive.

Thank you and thank you all for attending and I just need to remind you that in order to invest in these two quality properties you have to buy LTC, since they are private. So thank you all for attending this morning and we look forward to talking to you after the second quarter. Thank you.

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