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Edited Transcript of CTRE earnings conference call or presentation 8-May-19 5:00pm GMT

Q1 2019 CareTrust REIT Inc Earnings Call

Mission Viejo Jun 1, 2019 (Thomson StreetEvents) -- Edited Transcript of CareTrust REIT Inc earnings conference call or presentation Wednesday, May 8, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David M. Sedgwick

CareTrust REIT, Inc. - COO

* Eric Gillis

CareTrust REIT, Inc. - Director of Asset Management

* Gregory K. Stapley

CareTrust REIT, Inc. - Chairman, President & CEO

* Lauren Beale

CareTrust REIT, Inc. - Controller

* Mark D. Lamb

CareTrust REIT, Inc. - CIO

* William M. Wagner

CareTrust REIT, Inc. - CFO, Treasurer & Secretary

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Conference Call Participants

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* Chad Christopher Vanacore

Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst

* Daniel Marc Bernstein

Capital One Securities, Inc., Research Division - Research Analyst

* Duncan Brown

Wells Fargo Securities, LLC, Research Division - MD and Senior High Yield Health Care Analyst

* Jonathan Hughes

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Jordan Sadler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Michael Albert Carroll

RBC Capital Markets, LLC, Research Division - Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the CareTrust REIT First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to Lauren Beale, CareTrust Controller. You may begin.

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Lauren Beale, CareTrust REIT, Inc. - Controller [2]

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Thanks, Michelle. Welcome to CareTrust REIT's First Quarter 2019 Earnings Call. Please note that this call is being recorded.

Before we begin, please be advised that any forward-looking statements made on today's call are based on management's current expectations, assumptions and beliefs about CareTrust's business and the environment in which it operates. These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financing and other matters, all of which are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied herein. Listeners should not place undue reliance on forward-looking statements and are encouraged to review CareTrust's SEC filings for a more complete discussion of factors that could impact results as well as any financial or other statistical information required by SEC Regulation G.

During the call, the company will reference non-GAAP metrics, such as EBITDA, FFO and FAD, and normalized EBITDA, FFO and FAD. When viewed together with GAAP results, the company believes these measures can provide a more complete understanding of its business but cautions that they should not be relied upon to the exclusion of GAAP reports. Except as required by law, CareTrust REIT and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, change in circumstances or for any other reason.

Listeners are also advised that CareTrust yesterday filed its Form 10-Q, an 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 include Bill Wagner, Chief Financial Officer; Dave Sedgwick, Chief Operating Officer; Mark Lamb, Chief Investment Officer; and Eric Gillis, Director of Asset Management.

I will now turn the call over to Greg Stapley, CareTrust REIT's Chairman and CEO.

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [3]

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Thank you, Lauren. Good morning, and welcome, everyone. It was an eventful quarter. Thanks to the great teams with me here today, 2019 is off to the fast start in the company's history. In the quarter and since, we significantly expanded and extended out our revolving credit facility and our 7-year term loan, while at the same time reducing our interest rates and borrowing costs.

We exhausted our ATM Program raising $47 million in the quarter against healthy demand for our stock, and then we refreshed the ATM Program with a new $300 million ATM that we can easily use to match fund smaller acquisitions going forward. We raised almost $150 million on an overnight in April that was nearly 4x oversubscribed, and we made $290 million in new investments that we're really excited about. And best of all, most importantly, we brought on 2 outstanding new operators in the process.

We did use the ATM and the overnight strategically to keep leverage down through this growth spurt, which muted the per share numbers a bit. But we're raising guidance today, and we're really well positioned to grow when, where and how we want to over the next couple of years, especially if we see the pendulum swing back towards a buyers’ market. We are not predicting that, but we are ready if and when that day comes, and we intend to stay ready while continuing to grow in a disciplined way.

We also remain earnestly engaged in finding and partnering with the very best health care operators in the country, and we're more committed than ever to our operator-first underwriting approach and portfolio management model.

With that, I'd like to turn some time over to the team. Dave will first talk a little bit about our current assets and operators, Mark will then discuss recent acquisitions in the pipeline, and Bill will wrap up with the financials. Dave?

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David M. Sedgwick, CareTrust REIT, Inc. - COO [4]

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Thanks, Greg, and good morning. The year is off to a great start with new acquisitions that have expanded and strengthened our portfolio in multiple ways. First, the new investments for our current operators, WLC Management and PMG, have given those outstanding tenants additional scale with stable cash flowing facilities. For WLC, the Illinois SNF AL campus we acquired fits right in their footprint and the market is a great match for their unique skill sets. For PMG, the 8 properties in Louisiana are a perfect fit since they are right in their backyard, and PMG's principles personally operated these buildings for the original owner several years ago. So they know the operations and the markets unusually well. Both transitions have gone well so far and both, we and our operating partners, couldn't be more pleased.

Second, our $44 million California sale-leaseback transaction with the current tenant, Covenant Care, allowed us to consolidate 4 newly acquired facilities with 4 existing assets into a single master lease. The existing assets had been under 3 stand-alone leases that we had acquired from different sellers at different times and had remaining lease terms of less than 5 years, so getting all of them onto a new long-term master lease was a double win for CareTrust.

Third, 2 of the deals allowed us to establish operating relationships with 2 outstanding new tenants, Southwest LTC and Next Gen. Southwest LTC currently operates 24 skilled nursing facilities and 7 assisted living facilities across Texas and Oklahoma. The 20-year-old company is led by Ronald Payne, a well-regarded longtime operator who also happens to be the current Chairman of the Texas Health Care Association. Southwest LTC has carved out its niche by proficiently running more rural and small market facilities, like before we matched them with in Texas.

Next Gen is part of a larger organization that operates 5 skilled nursing facilities in the Houston and Dallas areas. Their team is led by Sharlyn Threadgill, a well-respected veteran operator with a track record of quality care and financial success. Their expertise in working with managed care organizations and the higher skilled -- skill mix model made them an excellent choice for the new Dallas property as well as some other potential acquisitions in our current pipeline.

As you can tell, we're excited about these new relationships, and we plan to grow with both Next Gen and Southwest LTC in the future. At the same time, we are continually reevaluating the existing portfolio and operator pool to be sure that each asset and operator continues to meet our rigorous standards and long-term growth expectations. This is all part of our ongoing operator-first model, and we continue to look for more and better ways to find, evaluate, monitor and support our tenants and their operations. To that end, in March, we hosted a 3-day conference for our skilled nursing operators. At the conference, we dove deeper into PDPM and other current topics to help them prepare for and take advantage of the upcoming changes. The conference was well attended and very productive, and we plan to make it an annual event.

Looking at the broader industry, labor headwinds are still very much a challenge, highlighting now more than ever the need for operators to first become the employers of choice in their markets so that they can then become the care providers of choice in those markets. The 2.5% Medicare rate increase announced for the next 2 fiscal years is very positive for skilled operators, but nothing is more important than the culture of care they foster in their operations. And that's one of the many things we screen and monitor for as part of our portfolio management efforts. We're also optimistic about the opportunities PDPM will present for our operators and our tenants have echoed that optimism.

And with that, I'll hand it over to Mark to talk you about the pipeline. Mark?

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Mark D. Lamb, CareTrust REIT, Inc. - CIO [5]

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Thanks, Dave, and hello, everyone. In Q1, we closed approximately $64.3 million in investments composed of a $9 million tack on with WLC Management in Southern Illinois and the $43.9 million sale-leaseback with Covenant Care in California. We also provided Covenant Care with $11.4 million short-term mortgage loan. Since quarter end, we closed on a $10 million acquisition in the DFW area with a great new operator in Next Gen that we anticipate growing with very soon, as Dave just mentioned.

Also, as most of you are aware, on April 1, we invested $215 million in a 12 building portfolio in Texas and Louisiana that we are very excited about. We picked up the portfolio from a private equity firm that we partnered with before who had acquired it in a larger transaction with another landlord, and we immediately replaced with existing operator who had filed for bankruptcy.

We are sometimes asked how assets that another landlord has deemed undesirable can be the complete opposite in our portfolio. Our experience proves that assets that languish in the hands of troubled operators can perform beautifully under the management of superior ones. For the most part, health care properties themselves are neither inherently bad nor good. They are simply brick-and-mortar assets, a tool with which to do a job. Yes, some are more desirable than others, but the real difference lies not in the architecture, construction or location, but in the operator's expertise and their commitment to care. This principle has been proven over and over, and we take our jobs very seriously to place CareTrust assets in the hands of the very best care providers and businesspeople we can find.

For this reason, we can comfortably say that we expect the assets that we acquired from trouble operators and/or their landlords will be healthy under the management of the new operators we brought in. This is certainly the case with the Louisiana and Texas acquisition, and we will continue to look for similar opportunities. Altogether, these acquisitions bring our year-to-date investment total to $290 million.

Turning to the market. After a strong start that's kept us very busy, we are rebuilding the pipeline largely with skilled nursing assets. We are seeing actionable opportunities in markets that we and our operators like, and as we sit here today, our pipeline is back in the -- our normal $100 million to $125 million range. It consists mostly of singles and doubles and a couple of small portfolios and includes tack-ons for our existing operators as well as deals that we can pair with our new operators.

Please remember that when we quote our pipe, we only quote deals we are actively pursuing, which meet the 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'll turn it over to Bill to discuss the financials.

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William M. Wagner, CareTrust REIT, Inc. - CFO, Treasurer & Secretary [6]

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Thanks, Mark. For the quarter, we're pleased to report that normalized FFO grew by 16% over the prior year quarter to $27.9 million and normalized FAD also grew by 16% to $29 million. Due to some dilution, we consciously took in anticipation of the $215 million April 1 deal Mark talked about, normalized FFO per share was flat at $0.32 as was normalized FAD per share at $0.33.

Given our most recent dividend of $0.225 per share, this equates to a payout ratio of 70% on FFO and 68% on FAD, which again represents one of the best covered dividends in all the health care REIT sector.

We continued to strengthen our leverage and liquidity positions while closing our largest investment to date. To that, in the quarter, we issued 2.5 million shares under our ATM at an average price of $19.48, resulting in $47.3 million of net proceeds. Those sales essentially exhausted our old ATM, and we have since put up a new $300 million ATM but have not sold any shares under it. We also closed on a new $600 million revolver and $200 million 7-year term loan reducing our borrowing costs, again, and pushing our earliest debt maturities out to 2024.

And finally, in April, we sold via an overnight offering, 6.6 million shares at $23.35 per share, resulting in net proceeds of $148.4 million. These proceeds were used to pay down the revolver following the 12 facility Louisiana, Texas acquisition that closed on April 1. All of this resulted in a rating upgrade from Moody's. Our revolver balance currently sits at $45 million.

For guidance, in yesterday's press release, we increased our 2019 annual guidance by $0.05, projecting normalized FFO per share of $1.35 to $1.37 and normalized FAD per share of $1.40 to $1.42. This guidance includes all investments made to date, the recently completed credit facility amendments, the recently completed stock offering, a diluted weighted average share count of 93.5 million shares and also relies on the following assumptions: one, no additional investments or dispositions nor any further debt or equity issuances this year; two, inflation-based rent escalations, which account for almost all of our escalators at an average of 1.5%.

Our total rental revenues for the year, again, including only acquisitions made to date are projected at approximately $167 million, which includes approximately $1.8 million of straight-line rent. Not included in this amount are tenant reimbursements, which we previously accounted for on its own line item in the income statement. Due to the new leasing standard, these are now grouped with rental revenues but the amount included in rental revenues can be seen under expenses as property taxes; three, our 3 independent living facilities are projected to do about $500,000 in NOI this year; four, interest income of approximately $2 million; five, interest expense of approximately $28.1 million.

In our calculations, we have assumed a LIBOR rate of 2.5%. That plus the newly reduced grid-based LIBOR margin rates of 125 bps on the revolver and 150 bps on the 7-year term loan make up the floating rates on our revolver and term loan. Interest expense also includes roughly $2.1 million of amortization of deferred financing fees; and six, we are projecting G&A of approximately $13.8 million to $15.3 million. Our G&A projections also include roughly $4.2 million of amortization of stock comp.

As for our credit stats, calculated on a run-rate basis as of today, our net debt-to-EBITDA is approximately 3.3x, leverage is about 19% of enterprise value and our fixed charge coverage ratio is approximately 6.2x. We also have $13 million of cash on hand.

And with that, I will turn it back to Greg.

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [7]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jordan Sadler of KeyBanc Capital Markets.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [2]

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First, just wanted to get a little bit of color on the pipeline that you're seeing now. Is it predominantly skilled nursing assets? And what are you seeing in terms of sort of flow of assets on the market versus appetite from competitive capital? Just frame up the environment for us.

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Mark D. Lamb, CareTrust REIT, Inc. - CIO [3]

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Sure. Jordan, it's Mark. I would say, certainly, on the SNF side, we continue to see non-strategic buildings from operators who continue to prune their portfolios. So sometimes, whether it's geographically an outlier or for whatever reason, maybe financially a building is breaking even and doesn't make sense or even on the regulatory side if it's in a region that is a little bit either more challenging or the regulators in that region have kind of signaled to the operator, it's time to go. There is also, I would say, it's -- there has been a slowing in REIT dispositions, but we continue to see opportunities on a much more selective basis there, and then, we continue to see mom-and-pops who are exiting for various reasons. So that's kind of what, call it, what we're seeing in the market. In terms of the composition of our pipeline, it's made up of operators who are dispossessing assets that don't fit their portfolio and then a couple mom-and-pops who just want to exit.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [4]

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And then, are you seeing more capital come in and chase skilled assets given sort of PDPM post CMS recommendation sort of increased optimism and seemingly stabilization on the skilled side?

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Mark D. Lamb, CareTrust REIT, Inc. - CIO [5]

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No. It's really, call it, unchanged from what we've seen in, yes, I would say, over the past 12 to 24 months, in that you continue to have private buyers who understand the upside in the space. And I wouldn't say there's as much private equity that's chasing, but I would say kind of private syndicated buyers continue to look for opportunities. I was actually back at LTC 100 back in Florida earlier this week, and there's an abundance of capital but it's really largely from the same spots. Some REITs, some nontraded REITs as well as, I'd say, the private buyer as well as well-capitalized operators are all there and they have been there for the last 12 to 24 months.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [6]

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Okay. And then just moving on to sort of the new portfolio, any sort of commentary 1 month in early days, but just a quick update of what you're seeing?

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Mark D. Lamb, CareTrust REIT, Inc. - CIO [7]

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In terms of the Louisiana piece, the portfolio is exactly what we expected. The good news is that as we stated over and over, the operator Priority Management Group has operated this in a past life. And so they understand really kind of where the buildings need to get back to. And so nothing from an occupancy. I think from -- the latest numbers from the skilled mixed perspective, they're ahead of pace from an overall occupancy perspective, they are slightly behind, but it's all largely due to 1 building. They are very, very optimistic. We're going to give them up to $7 million to fix up the buildings, and we expect to get that capital plan rolled out over the next couple months. But the portfolio is steady. It was steady when it was handed over, and the new operator, PMG, is making physician -- kind of reconnecting with old physician relationships and doing exactly what we would expect them to do, call it, 45 days into the transition.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [8]

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What are the occupancies look like on the portfolio?

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Mark D. Lamb, CareTrust REIT, Inc. - CIO [9]

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I don't -- I have it on a kind of a total dollar -- or a total per patient day. I think it's -- I would say it's mid- to high-80s, but I can circle back with you and get the exact numbers offline.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [10]

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But not far off of sort of stabilized (inaudible).

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Mark D. Lamb, CareTrust REIT, Inc. - CIO [11]

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No. It's been stable. I mean we took over and the occupancy was in the 80s, and it's there today. I just can't give you an exact percentage.

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [12]

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And Jordan, just a reminder. This is the part of the Senior Care Centers portfolio that Senior Care Centers didn't want to lose because it was stable and cash flowing. So we got in fairly good shape, and it's actually ahead of where we expected it to be.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [13]

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Okay. I guess I was kind of curious if everything fall out amidst the transition or amidst the bankruptcy, et cetera. That was more along the lines of my question. Is the Texas piece of portfolio similar condition?

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Mark D. Lamb, CareTrust REIT, Inc. - CIO [14]

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It is. It's -- there are -- from an occupancy perspective, it's really kind of in the same spot that it was when we underwrote it kind of using the numbers through October of 2018 -- 2019, so the Texas portfolio is stable. It's got a little bit of -- it's got independent living and assisted living in it. So it's got little bit of senior housing to help out in terms of where the upside is going to be in addition to transferring the overall occupancy north. So far so good, but we're only 38 days in.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [15]

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Okay. Then last one just, maybe Greg, on the Ensign news, the spinoff of tenant. Can you maybe comment on any impact you see to the underlying credit or -- positive or negative? And any impact on the relationship longer term?

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [16]

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Sure. I would just tell you this from our perspective, Jordan, the spinoff's largely a nonevent. A few of our assets would become part of the new company, but it won't reduce our rental income, and according to their proposal to us, instead of 1 guarantor, we'll have 2 well-capitalized companies, public companies, guaranteeing that tenant master lease. So the only visible change from our perspective will be a reduction in our tenant concentration with our largest tenant, which I think most people know has not really been a very high priority for us lately, and frankly, for most of you lately since they're a good tenant with solid lease coverage. So there's still lot of details and documents to work out, but we're happy to work with them as we always are to help them accomplish their goals.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [17]

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And so a couple of assets will sit in tenant you're saying?

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [18]

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There'll be several -- yes, several assets would go to tenants.

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Operator [19]

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Our next question comes from Chad Vanacore of Stifel.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [20]

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Just sticking with that Ensign spinoff question, do you have any ability to impede a spin if it made sense to you?

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [21]

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Well, Chad, I mean, it really doesn't make sense to us. I don't see any -- I think this spin is probably a positive thing for everybody. We certainly know the guys that are going to be running Pennant, very, very well and think very, very highly of them. I suppose we could decline to play, but I just don't know why we would. Ensign has been a good tenant for us, the rent comes are on time. Pennant is -- we believe that Pennant is going to be every bit as good. We think there is some things about this spin that actually make a ton of sense for both companies and for us as well. And so all that said, I don't really see any reason to even think about not helping them do this. It's not a bad thing.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [22]

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All right. So it's fair to say you're supportive. All right. And then just thinking about the operator conference that you had, outside from PDPM and labor expense inflation which have been pretty well bandied about, what are maybe some of the other concerns that operators are having? Concerns and opportunity, what were the most discussed at operator conference?

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David M. Sedgwick, CareTrust REIT, Inc. - COO [23]

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Chad, this is Dave. I'll tell you, PDPM did take a lot of -- we did have a lot of airtime on PDPM and really digging in to how to prepare for that. Of course, labor is an important topic and not just in the operator conference, but as part of our asset management efforts, we try to share as many best practices as we can with our operators to really position themselves as that provider -- as that employer of choice to the battle for talent locally, so that they could become that provider of choice.

We talked about the 5-star program as well, changes to the Medicare requirements as well. And a lot of the time at the conference was spent on -- with PointRight. So we had PointRight actually there present, and we rolled out to them that tool. And what that tool does is it gives high level, it gives the operators more information than they had before about how they are viewed in their markets in terms of readmission rates to the hospital, even by diagnosis code, star ratings and different things that help them not just see themselves, but in relation to their competition. And our operators can use that information and anecdotally, we've already seeing them successfully do this. Well, they'll take that information to their hospitals and health plans and that information trumps the star rating to a degree and it helps them get into these preferred provider networks that are so important. So that pretty much summarizes the content that we covered in the operator conference.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [24]

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All right. Well, thinking about that star rating, there has been a change in how CMS is calculating star ratings. Have you gone through your portfolio and see how that's actually affected your operators?

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Eric Gillis, CareTrust REIT, Inc. - Director of Asset Management [25]

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This is Eric. We are quite right as currently right now doing a gathering all the data for us with the star ratings and we -- anecdotally, we know some that have -- had a decrease, but also know of several that have increased as well. But they're pulling all that data for us to do some analysis on all of our portfolio.

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Operator [26]

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Our next question comes from Jonathan Hughes of Raymond James.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [27]

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Mark, can you give us some color on the pricing for SNF deals on the pipeline? Another skilled nursing owner earlier today mentioned that lease yields have come down a little as the tenure has dropped. Are you seeing a similar trend?

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Mark D. Lamb, CareTrust REIT, Inc. - CIO [28]

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Yes. I'll jump in and then Greg can clean up for whatever I say. But I would say, it's going to range from, I would say, 9 to 9.25. We've stated in the past that we're willing to give up a little bit of yield for additional coverage, and we're happy to be kind of in the low-9s to get to the corresponding coverage that we're hopeful for. So the entire pipeline is, call it, 9 to 9.5, but really more of it is in the 9.25 to 9 range.

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [29]

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Good answer. Nothing to clean up.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [30]

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And then coverage still in that 1, 1.4 ballpark; 1.4, 1.5?

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Mark D. Lamb, CareTrust REIT, Inc. - CIO [31]

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Yes. As we've said -- as we underwrite and we put our old operator hats on and dig into the PPDs, we will initially start at 1.4 and then depending on, call it, day 1 changes and where we think the operators will be able to end up on a pro forma basis, we really would like to see them north of 1.5 once they've got in and have executed their business plan 12 months out. So we start at 1.4 and sometimes, it ticks down if there is an inefficient operator, maybe we'll dip down into the 1.35 range if we feel like there's a lot of meat on the bone and there's a lot of changes that our operators can execute on, call it, day 1, but for the most part, we're right in around that 1.4.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [32]

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Okay. Great. And then, I guess, sticking with you Mark, on -- maybe on senior housing. There hasn't been a pure senior housing acquisition since, I think, 2017. Can you just talk about the investment opportunities within that sector? Are there not enough high-quality operators out there? And then does the announcement from Ensign, did that just create a new partner to grow with as they expand that company?

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Mark D. Lamb, CareTrust REIT, Inc. - CIO [33]

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Sure. So again, as we've said all along, we're asset class agnostic, and frankly, it's all about the operator; we continue to underwrite senior housing deals every day. But the reality of it is, is we just haven't been able to pair an acquisition target with an operator that we like. And sometimes, we'll find assets that we really like that, maybe it's geographically in a spot that we don't have the right fit from an operator perspective. And then, conversely, we continue to nurture relationships with senior housing operators, but we just haven't found anything that is fit both of us. I mean it's -- obviously, some of the bigger players in the senior housing space are just kind of capping NOI and not taking into consideration coverage and bringing in AL operators to just manage on an incentive basis, while the big 3 can come in much lower on a yield basis and get a little bit more coverage to where it would maybe makes a little more sense for them. So we continue to look at opportunities, we just haven't been able to hit.

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [34]

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Jon, this is Greg. I'll pick up the last part of your question about whether the Ensign spinoff tenant gives us a new partner. The answer is, of course, it does, but I think, ideally, the logical approach is that we would give them some time for the dust to settle on their spin; them to sort of get that all digested before we contemplate that. However, you know us, we're opportunistic acquirers, and if the right opportunity came along sooner than that, we'd certainly explore with them. So everything's on the table. We have it redlined seniors housing. We just haven't seen a ton of it lately that we thought was a good match for our operator pool. And as far as Mark said, the pricing just, in a lot of cases, doesn't make the best sense to us.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [35]

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Okay. Fair enough. And then just one more, maybe for Bill, I don't want to leave you out. But target leverage, I think, still in that 4 to 5x the range, but we haven't been there since early last year. I mean has that target leverage range shifted down a little given where your cost of equity is so favorable? I mean why not keep tapping that ATM to keep it as low as possible? Which seems you are doing; I'd just love to hear any color and thoughts you have there.

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William M. Wagner, CareTrust REIT, Inc. - CFO, Treasurer & Secretary [36]

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Jonathan, while our stated ranges 4 to 5x, we really like sitting in the 3s. We've proven that we can still grow accretively while maintaining a very conservative balance sheet, but having that range where it is allows us to stretch in the event we find a larger opportunistic transaction that fits well into our existing portfolio.

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Operator [37]

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Our next question comes from Michael Carroll of RBC Capital Markets.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [38]

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I just wanted to touch on the conference that Dave mentioned in his prepared remarks. And I guess how do you -- how are the operators prepared right now? Are you confident that the majority of the operators are well positioned to handle the PDPM change that's coming on in October 1? Or do you expect some type of volatility in results?

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [39]

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Thanks, Michael. The high-level easy answer is that we think that our operators are just about as well prepared as they can be at this point. We know that they're spending a lot of time preparing for it, not just with our conference, but they are going to state association conferences. There's a big group of consultants that are doing a lot of business on PDPM right now as well. And we're confident that our operators are going to hit the ground running. At the same time, it is a major shift and will take some time to, I'd say, fully capture the opportunity. So I think that there will be a little bit of a ramp in terms of capitalizing on the efficiencies that are available, making sure that the training really sunk in, in terms of the documentation and the change of focus and attention to different parts of the MDS that is required, but overall, we feel pretty good about it.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [40]

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I guess how do you think the rest of market is prepared for, I guess, PDPM coming in? And I guess do you guys see any opportunities of, I guess, some operators not being able to make the transition or not wanting to do the transition and electing to sell their portfolio and that's some more opportunities for you to get more acquisition volume?

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Mark D. Lamb, CareTrust REIT, Inc. - CIO [41]

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Yes. Michael, this is Mark. We haven't seen necessary the volume that maybe I personally expected, but it's coming rather quickly. And I think operators are ramping up for it, but the answer is no. We're not exactly seeing a bunch of mom-and-pops or call it, more unsophisticated operators that are just kind of throwing in the towel and heading for the hills.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [42]

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Okay. Great. And then I guess, last question, I just wanted to talk about the senior housing results. I know the comparison pools might be different, but it looks like coverage dropped a little bit this quarter. Was that just a difference in the comparison pools? Or is there something going on within the senior housing coverage ratios?

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David M. Sedgwick, CareTrust REIT, Inc. - COO [43]

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Yes. So occupancy did tick down slightly and coverage ticked down as well a bit. What explains that is principally management turnover at the regional and local levels for couple of our operators. The post-acute and seniors housing businesses is super leadership management sensitive, as Mark alluded to in his remarks. So when changes are needed and ultimately made in leadership, there is usually a temporary dip to results. And the fact that the seniors housing piece of our portfolio is small also tend to magnify how those challenges appear to the outside observers, but we'd expect to see much of the recovery here in the second half of this year.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [44]

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Okay. So those transitions have already occurred and you think that they got a good handle on those transitions right now?

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David M. Sedgwick, CareTrust REIT, Inc. - COO [45]

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Yes.

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Operator [46]

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Our next question comes from Daniel Bernstein of Capital One.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [47]

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I'll go just the opposite, the skilled nursing coverages kind of ticked up a little bit this quarter. And was that all Ensign? Or was that kind of more broad-based for some of those assets that you've been transitioning?

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David M. Sedgwick, CareTrust REIT, Inc. - COO [48]

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We have seen, Daniel, some great upticks in our operators outside of Ensign as well. So we've seen in the last quarter to actually last half of the year, a largest majority of our senior -- or sorry, our skilled nursing operators are doing some great things and has seen some upticks especially in this fourth quarter.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [49]

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Is that all they're managing their mix better or labor cost? What's kind of -- what are those operators doing operationally that are helping them manage the current challenging situation out there for SNFs?

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David M. Sedgwick, CareTrust REIT, Inc. - COO [50]

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Yes. I think it's a little bit of everything. I think that we've had some operators that had newer buildings that with transitions that we -- deals that we've done earlier that are really getting in with the hospital networks and with the health plans and are securing relationships and their leadership in those markets has started to mature. And so you're seeing the fruits of those early labors when they took on the acquisitions that we're now starting to really see them and have success in those markets. So largely, we're seeing that leadership with those buildings are really having an effect on their coverage and they're able to get the best of the best employees in those areas and then with that great care, leading to [surplus] development. So we're seeing some great stuff from a lot of our operators in that aspect.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [51]

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And then you made some more acquisitions in Texas. Are you targeting Texas specifically? And maybe kind of does that relate to any thoughts, potential positive outcomes for Texas reimbursement?

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Mark D. Lamb, CareTrust REIT, Inc. - CIO [52]

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Dan, it's Mark. We're just kind of going to where the opportunities are. And we've -- as a result of the big transaction got to know a couple different operators out in the Texas markets. And so we like -- Next Gen is a prime example. They're a great operator. They're focused on the right things. Very, very -- the owner, Sharlyn Threadgill, she's very, very involved, daily visits her properties on a regular basis. And so there is an opportunity to match her with an asset there in Dallas that we picked up and it was great fit. And we're really excited about she and her team as an operator and as an operating partner to grow with. So I would say, it's a little bit more opportunistic.

I think in terms of the bed tax question, I don't think we have any updated information as of this week that wasn't available last week. I think they're still trying to get it through committee. I'm not sure if that will happen or not. Haven't heard anything over the last couple days that suggest it will or it won't. So from that perspective, we just -- Texas just continues to show that there are operators that are struggling or have to chop off an asset or 2 because strategically, it doesn't make sense, and we happen to have a great operator that is willing to step in there.

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Operator [53]

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(Operator Instructions) Our next question comes from John Kim of BMO Capital Markets.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [54]

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On the senior housing coverage, the 1.04, can you just remind us what percentage of the senior housing portfolio this represents, the ex Ensign and transition's building?

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William M. Wagner, CareTrust REIT, Inc. - CFO, Treasurer & Secretary [55]

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As a -- like, as a -- John, as a percent of revenue?

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [56]

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Yes, either that or facilities, so I guess, percentage of revenue. Of the 13% at senior housing, what percentage does this 1.04 represent?

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William M. Wagner, CareTrust REIT, Inc. - CFO, Treasurer & Secretary [57]

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Well below 10%.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [58]

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Okay. So it sounds like from Dave's commentary that you don't expect this is something that you'll need to address this year in terms of either transition or sell some of the assets or restructure leases?

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David M. Sedgwick, CareTrust REIT, Inc. - COO [59]

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This is David, again. Sometimes when you acquire portfolios, you take on 1 or 2 that you're a little bit less excited about than others and you, along with the operator, watch them closely. So whether it's a particular facility or an operator who wants to make a strategic change, we will take it case by case. And we're always -- like I said in my prepared remarks, we're always looking and re-examining our facilities and operators, but at this point, there's nothing to really talk about.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [60]

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Turning to Ensign. On their call yesterday, they again discussed unlocking the value of the real estate, and I was just wondering what's likelihood that you'll be involved in that?

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [61]

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John, this is Greg. I think the likelihood that we'll be involved in that is relatively low at this point. I'm not sure exactly what they're planning to do in terms of unlocking that value, but we haven't had any conversation with them about anything like that.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [62]

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And then finally, is there anything that you can share as far as what you think the strategy is for BlueMountain and the remaining senior care portfolio that they retained?

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Mark D. Lamb, CareTrust REIT, Inc. - CIO [63]

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Yes. John, this is Mark. I think they held some assets and then I think they transitioned a number of assets to -- off the top of my head, I don't know exactly how many they kept and how many they transitioned of the 28-or-so that they picked up, and we picked up 12. And then I think they probably kept half, and I think they probably sold off the other half. So again, they have an operating company down in Texas Regency, and so they kept some assets of that Regency; could expand their footprint, I believe into the Austin and San Antonio markets.

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Operator [64]

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Our next question comes from Duncan Brown of Wells Fargo.

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Duncan Brown, Wells Fargo Securities, LLC, Research Division - MD and Senior High Yield Health Care Analyst [65]

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Most of mine have been answered. And I may have missed this, but did you say, Greg, what number of facilities are going over to spinco with the Ensign deal?

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [66]

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We didn't. But I can tell you, they've asked us to move 11.

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Duncan Brown, Wells Fargo Securities, LLC, Research Division - MD and Senior High Yield Health Care Analyst [67]

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Is there anything unusual that we should know about those? Or that's just -- anything we should be thinking about there?

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [68]

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No. I don't think so. It's -- for us the key is that while Pennant is a new company, we understand their -- the plan is they'll be well capitalized. They're certainly well led. And we will have the Ensign guarantee so the credit profile standing behind that rent and that lease will not change at all.

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Duncan Brown, Wells Fargo Securities, LLC, Research Division - MD and Senior High Yield Health Care Analyst [69]

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Okay. That make sense. And then on PDPM, I appreciate all the color. It sounds like most operators are, I think, as prepared as they can be. There is going to be a ramp. I guess it sounds like a generalization. Are there some operators within your portfolio where you have some concerns of how they are going to respond? Or is it pretty much across the board feel pretty good that there's not going to be big hiccups as this goes live?

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [70]

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I stay in touch with all of our operators when it comes to PDPM and even sat on a presentation of a training that our operator was giving to their frontline staff. And we really feel comfortable about the way that they're attacking this and the way that they're preparing for it and feel like they all have it at front of mind and are really now starting to train their frontline staff and get them ready and prepared for that October 1. So we're fairly comfortable with their preparation. And it was nice, again, at the conference to be able to be with them there and be with that -- sit in on those presentations about PDPM and we're optimistic and feel comfortable about what they're doing to prepare.

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Duncan Brown, Wells Fargo Securities, LLC, Research Division - MD and Senior High Yield Health Care Analyst [71]

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Okay. And then last one from me. The question on leverage was asked previously and obviously below the sort of target of 4 to 5. I guess keeping in the low 3s now, does that suggest that even though it's not in the pipeline now that there are some bigger options or strategic potentials that are percolating out there? Or am I reading too much into it?

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [72]

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Duncan, this is Greg. Probably reading a little too much into. As Mark said in his prepared remarks, the pipeline right now is kind of down at our normal $100 million to $125 million level and consist mostly of one-offs plus a couple of small portfolios. So the possibility that there would be some larger chunkier deals out there remains and being ready for them has become a high priority for us as we've seen how well this last one has gone. So I really guess it was already a high priority for us, but we really like -- as Bill said, we really like where we're living right now. But we do want you to understand that we're willing to go up to that 5 for the right deal if it makes sense and with the understanding that it would always be our agenda to get it right back down within a fairly reasonable period of time if we did that.

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Operator [73]

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There are no further questions. I'd like to turn the call back to over to Greg Stapley for the closing remarks.

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Gregory K. Stapley, CareTrust REIT, Inc. - Chairman, President & CEO [74]

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Well, everybody, thanks, again, for being on the call today and know that you can always call us at any time if you have any additional questions. Thanks, Michelle.

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Operator [75]

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You're welcome. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.