Q4 2021 CareTrust REIT Inc Earnings Call
Ladies and gentlemen, thank you for standing by and walk through the characteristics REIT fourth quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to turn the call.
Over to your host Lauren Beale characterize senior Vice President Controller, you may begin.
Thank you and welcome to <unk> fourth quarter 2021 earnings call.
We should be aware that this call is being recorded and listeners are advised that any forward looking statements made on today's call are based on management's current expectations assumptions and beliefs about surgery business and the environment.
These statements may include projections regarding future financial performance dividends acquisitions investment returns financings and other matters and may or may not reference matters affecting the company's business, where the business is in its tenants, including factors that are beyond their control such as natural disasters pandemics such as COVID-19.
Governmental actions the company's statements today and its business generally 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 your trust SEC filings for a more complete discussion of factors that could impact results as well as any.
Financial or other statistical information required by SEC regulation G.
Except as required by law I'd characterize <unk> REIT and its affiliates do not undertake to publicly update or revise any forward looking statements where changes arise as a result of new information future events changing circumstances or for any other reason.
During the call the company will reference non-GAAP metrics such as EBITDA.
Joe and F&B, or Fad and normalized EBITDA <unk> and F&B when viewed together with GAAP results. The company believes these measures can provide a more complete understanding of its business.
But they should not be relied upon to the exclusion of GAAP reports.
Yesterday characterize filed its Form 10-K , and accompanying press release and its quarterly financial supplement each of which can be accessed on the investor Relations section of characterize website at Www Dot care Trust REIT Dot com a replay of this call will also be available on the website for a limited period.
On the call. This morning are Dave Sedgwick, President and Chief Executive Officer, Bill Wagner, Chief Financial Officer, Mark Lamb, Chief Investment Officer, and Eric Gillis Senior Vice President of portfolio management and investments I'll now turn the call over to Dave Sedgwick, Tetra, Reese, President and CEO Dave.
Thanks, Lauren and good morning, everyone.
To start with the tip of the hat to our executive Chairman Greg Stapley.
All of US here and those associated with Kerr Trust Express our deep appreciation for his leadership.
During our first seven five years as our CEO .
He put this team together and took what was a highly levered spinoff with one tenant and grew it into one of the top performing health care Reits over the last seven years, producing north of 150% total shareholder return at the time of his church mission was announced in December .
With one of the strongest balance sheets in the business.
We wish him and his wife Debbie the best of luck in the next chapter of their lives.
Turning to the quarter, we're pleased to report 100% of contractual rents collected in the quarter, including the complete repayment of the one deferral rented last year, making the full year's collections also 100%.
The fact that we collected 100% of contractual rent over the past two years is a testament to the quality of our investments our operators and our team's ability to manage needed changes in the portfolio efficiently.
Despite the track record of strong returns since our inception. It has certainly not been all smooth sailing.
The team we have in place today has overcome several challenges over the years from some operators hitting the wall to strong competition for growth to changes in the regulatory field of play to a long running pandemic.
We have previously reported quarter over quarter occupancy recovery in skilled nursing, while seniors housing had remained flat and.
In the fourth quarter, we saw occupancy flattened across both asset classes in the latter part of the quarter.
Our portfolio was not immune from <unk> impact on employee infection rates and limitations on admissions.
We've repeatedly reported that a few of our operators have needed provider relief funding to mitigate the effects of COVID-19 on their operations.
Late last quarter.
<unk> HHS phase four provider relief disbursement provided insufficient runway for the soft landing we hoped for for a couple of our operators.
The resulting in 93% of contractual rent collected in January .
Throughout the pandemic, we have conducted stress tests of the portfolio and identified a handful of operators and properties that we believe pose an unacceptable risk of default has provided relief measures and.
For these relationships and properties, we've decided to take advantage of the frothy sellers' market and proactively remove these cracks and the associated uncertainty from our foundation as quickly and efficiently as possible.
We have begun to pursue the sale re tenanted or repurposing of up to 32 assets, representing approximately 10% of contractual rent.
We do not intend to play the defer and hope game with operators or properties that have been on our watch list since before the pandemic.
Rather we intend to take advantage of the seller's market redeploy any proceeds into new investments underwritten for today's realities and used this time to upgrade the risk profile of our growing portfolio.
Given the early stage of this plan, we will postpone guidance until we've made meaningful progress and will provide business updates along the way.
It is a seller's market today and yet we still do see opportunities to deploy capital this year.
Mark will expand on our investment outlook for the year, but I'll highlight a few things first.
We intend to take a small part of the 32 assets I mentioned and repurpose those into behavioral health facilities. We've been looking at this asset class three years and are thrilled to have found a proven operator, we're excited about.
And an entry point with some of our very own properties to convert into a higher and better use.
This will be a powerful new asset management tool to prune and strength in master leases in the future and it provides the company with the new growth vertical as well.
Second Mark will talk about an exciting new partnership with one of the industry's most respected lending teams, allowing us to continue to participate in the stories of some of the best operators in the business.
And for my last point on capital deployment.
Our stock repurchase program was approved in 2020 and is a significant lever available to us if the opportunity ever presented itself.
We should look back on 2022 as a pivotal year in our history.
Wherein we took the measures to deal with chronic watch list properties and reinforce our foundation to stand the test of time.
Whereas enthusiastic as ever about our expanding mission of matching high quality operators with great skilled nursing seniors housing and now behavioral health opportunities for many years to come.
With that I'll turn it over to Mark.
Good morning in Q4, we bought to seniors housing assets in New Jersey for $12 4 million. This acquisition brought our total investments in 2021 to approximately $200 million.
Looking at the pipe, we currently sit in our customary $75 million to $100 million range. The pipe is made up of singles and doubles predominantly snips with a few senior housing assets in there.
As Dave discussed we are excited about partnering with a leading lender in this space to fund a variety of loans, which we anticipate will lead us into markets and.
And operators, we have targeted for growth.
Looking at the market pricing on nursing homes has never been more robust. This we believe is due to a few things first there is not a significant amount of supply on the market. So everything that comes to market, especially if it's a portfolio of size gets bid up significantly.
Second there is a ton of private liquidity looking for deals that they can bridge to HUD.
Third many operators have figured out how to manage through Covid, that's come out on the other side stronger and more efficient.
Lastly on the senior housing front, we are seeing every type along the spectrum of stable and well performing to turnaround situations to buildings that are really struggling.
But we continue to underwrite and size opportunities for us and our operators in the senior space and hope to find a few nuggets.
In the coming quarters.
Looking forward, we anticipate the tight supply I mentioned above to loosen in the investment sales community continues.
To provide record numbers of opinions of value to existing owners, who are considering selling we're cautiously optimistic that the reality of stimulus right out and a tighter than ever labor market will force owners into selling their assets in the meantime, we continue to work with the brokerage community to find deals that fit with us and our.
Operators continue to rundown off market leads that you have grown accustomed to seeing us close on each year. Please.
Please remember that when we quote our pipe we only quote deals that we are actively pursuing under our current underwriting standards and then only if we have a reasonable level of confidence that we can lock them up and close them in the relatively near term.
And now I'll turn it over to bill to discuss the financials.
Thanks, Mark for the quarter normalized <unk> grew by 9% over the prior year quarter to $37 3 million and.
Normalized <unk> grew by 11, 5% to $39 8 million on.
On a per share basis normalized <unk> grew by eight 3% over the prior year quarter to 39 per share normalized <unk> grew by 10, 8% to <unk> 41 per share.
Our liquidity remains extremely strong with approximately $13 million in cash and $510 million available under our revolver.
Leverage also continues to be strong at a net debt to normalized EBITDA ratio of three seven times.
Our net debt to enterprise value was 23% as of quarter end and we achieved a fixed charge coverage ratio of eight seven times.
Cash collections for the quarter came in at 100% of contractual cash rent in January came in at 93%.
February currently stands at 92%.
As Dave previously mentioned we.
We are postponing issuing guidance for 2022 until the picture gets a little more clear on the timing of the sale re tenanted, a repurposing of up to 32 assets.
Soon as this becomes clear we will put this out in the <unk>.
Meantime, we will be putting out announcements as we make material progress.
And with that I'll turn it back to days. Thanks.
Thanks Bill.
We hope this discussion has been helpful and thank you for your continued support and with that I'd be happy to take questions.
Ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered you were seeing with yourself from the queue. Please press the pound key.
Our first question comes from Steven Valiquette with Barclays.
Hi, Thanks.
Good morning, and good afternoon, and thanks for taking the question I guess I was curious to hear more about the.
The opportunity on the behavioral health side.
A couple of questions around that first of all just curious hear more about the pipeline of opportunity we've seen a few other.
Health care rates also.
Attempt to diversify into that space.
Hi.
But also.
As far as any licensure as far as conversion of facilities curious hear more about that process, whether that's something that happens quickly or is that a lengthy process just more color around the nuts and bolts.
Most conversion opportunities as well.
Great. Thanks, Steve.
I'll take it and Mark can.
Correctly, where I go wrong, so its behavioral health, we like it for a couple of reasons.
And one is offensive and the other is defensive.
On the offensive side.
There's a lot of.
A lot of productivity in the market right now that is fairly distressed and that's not normally.
Okay.
Place that we'd like to play.
But if we can pick up some.
Really distressed assisted living and skilled nursing facilities at a good price.
And underwrite that along with the behavioral health operator.
And then take that and repurpose that for behavioral health that could be an interesting way to grow.
For Mark and his team for new investments.
But from an asset management perspective.
There are some select opportunities here, where that really makes a lot of sense. For example, if you have a portfolio a master lease that has really weighed down by one or two buildings with negative EBITDAR and if you can remove that from the master lease strengthen that tenant.
That remains with you and converted into a behavioral health.
That seems like a no brainer.
Especially if the yield that you'll get from that asset as competitive if not better than what you would get from re tenant team or redeploy sales proceeds.
And that's really what we've been looking at here, that's how we're starting <unk>.
You look at these 32 assets and you say, okay, which of these do we feel like the yields would be just as competitive with behavioral health that will start this relationship for us.
And an area that we've been looking at for quite some time.
And then it really to your question of licensing in the nuts and bolts.
Each state is very different.
It feels like maybe the nursing home industry did 30 to 40 years ago in terms of regulations.
And.
Licensing requirements.
But each state is different.
And from a timing perspective, we would expect.
12 to 18 months.
From signing the lease to redevelop in the asset to getting zoning in licensing and permits done.
Until that.
That rent will come online.
Okay. That's helpful. On the quick follow up is just from like a 10 31 exchange perspective should we assume that.
Whatever assets might be divested in the current portfolio. This year that from <unk> to 1% that most of the replacement would probably be on the behavioral health side is that just the right way to think about it for now or could there be some deviation on that I guess had with other opportunities either in senior housing or even maybe a few MBS sniff side as well.
No thanks for asking that.
As you think about new investments for care Trust this year.
I think the right thing the right way to think about that is that we will very much look this year like we had last year in terms of asset classes.
And that our entry into behavioral health will most likely be from Repurposing our own facilities. Among these 32.
In the future Thats not to say that in the future we will become more active in behavioral health, but that's how you should be thinking about how we will start it off.
Okay, alright, thanks for the clarity on that okay. Thanks.
You bet.
Our next question comes from Congress of Ischemic Brennan Berg.
Hi, everybody. Thanks for having me on the call so.
Just to dig.
Dig a little more into the sales and repositioning of these assets you identified I mean, you mentioned a handful of assets that could potentially be repositioned to behavioral health I mean can you provide any color as to what percentage of this.
Of this total ADR that could potentially be repositioned and then in the event that you are selling off another portion of the assets I mean, where do you seek to put those proceeds is there a potential that you engage in a stock buyback program or.
How would you look to invest in behavioral health facilities with those proceeds as well.
Well I'll go in reverse order I would say that all options are on the table when it comes to redeploying those assets those proceeds including behavioral health, but like I. Just said what I would expect is that you would see the redeployment of that capital into the.
Skilled nursing and seniors house seniors housing assets as we have historically done.
Pat.
Historical underwriting and the rates there.
When it comes to the percent that could be read.
Sold versus re tenanted versus repurposed at this stage were.
Reluctant.
To really say much on that because we're just not far enough along.
Particularly with behavioral health.
Unlike skilled nursing and seniors housing there is a gating item of zoning that's really important.
And.
That zoning that preliminary diligence work is being done right now.
A handful of these properties, but until we have cleared those gates.
It could be it could be none.
It could be a few it could be a handful, but until we have done some preliminary diligence on zoning probably not really helpful to to guess at this point.
Okay. Okay that helps and then you had mentioned that the yields on behavioral health could potentially look similar to.
<unk> skilled nursing facilities that may be repositioned or repurposed.
Can you give any sense of what those lease agreements could look like and then more specifically with the rent coverage metrics be similar for behavioral health versus skilled nursing as well.
Yes, so we're anticipating that stabilized lease coverage for behavioral health properties would be north of skilled nursing.
Probably north of three times coverage.
And that the the yields on and if we were to do a new investment we probably.
B and the nines as well.
Okay that helps and then just one final one just to clarify on external activity. So the agreement to invest in this variety of loan products. As you stated that that is separate from the real asset acquisitions that you could engage in 2022 as well correct.
Yeah, Hey, this is mark.
It's.
It's sort of a kind of a another another pipeline for us.
We.
Everything that I.
Quoted in the pipe was call it our normal bread and butter business with skilled nurses.
And seniors housing.
The triple net side.
And so we've.
Discussions with its lender over over the last couple of months.
I would expect to see opportunities crossing our desk in the coming weeks.
So but.
Yes.
No we won't.
We won't veer from our bread and butter and that's investing in skilled nursing and seniors housing.
A triple net basis.
Okay I'll leave it there for now thank you.
Our next question comes from Montana, Breo with BMO capital markets.
Hi, good morning, Chris.
Question on the on the 32 assets, 10% of rents can you give us any sensor.
Split is between seniors and scaled.
I'm really kind of what what changed in the last three months.
You had some funds come in.
Going to flatline, but hopefully what what got worse here.
The labor situation that kind of pushed.
Over the edge and we are now able to collect.
Percentage rents or do you think that 93 drops.
92.
Client gets enacted.
Comparable.
That's 10% of your rent base.
Yes.
<unk>.
As we've been stress testing the portfolio all along the pandemic.
Really update it with.
The new information.
Covid presents so last year, we updated our stress tests.
With the impacts of the Delta.
We.
We saw after delta and into Q4.
These labor costs.
Appeared to be more long lasting.
Then.
Then maybe six to nine months before that.
Going into towards the end of the year.
There was a lot of anticipation around the phase four funds.
And we knew that there was going to be another phase, but we didn't have visibility into how much was it was going to come.
And then you have omicron.
And kind of at the same time that those phase four funds hit.
That's that's four pretty important data points.
That.
Impacted our stress test as we look forward and so then when January hits.
We don't collect 100% Theres certainly.
Some operators in.
Properties and relationships that we have to deal with there, but we also factored in this updated stress test model to look beyond January and February and March and look more at Okay. What is what does the world look like after these provider relief measures go away.
And Thats why we did it just take action or not just taken action with the properties that are.
Impacted in January , but really even with properties and relationships that are current with rent.
But we feel like Theres a bit of inevitability.
For risk of default in the future. According to these stress tests.
So that's that's what's changed.
Our thinking is instead of playing the defer and hope game with folks that have been on our watch list for so long.
It makes more sense to remove the uncertainty.
That's presented by those operators and.
Be more decisive with it right now.
The mix. It is it is a mix of skilled nursing and seniors housing.
We'll we'll.
We will update everybody on.
The specific mix as we have come to milestone agreements.
For sales and re tenanted and things like that.
And can you provide any sense of what the coverage levels.
Look go from and to.
As you do this.
<unk>.
How long do you anticipate this whole process will last before we get.
Clarity on go forward earnings run rate.
Yes, so the coverage situation will improve.
All things.
If things kind of staying the same.
In the future as we take.
Take care of these 32 properties.
And I'm happy to give kind of pro forma numbers on that as.
We go from LOI to actual closing deals.
It would be premature to do it at this point.
But we are committed to providing those business updates along the way.
The second part of your question was what.
The timing of when you expect.
Earnings clarity I went to when this could be done.
Yes.
So.
At this point I will just give you some color about where we are and that will help.
Thank you gauge the timing of it.
We've had really productive collaborative conversations with our main operators involved in these 32 assets.
Engaged a few of the best brokerages and the business gotten their opinions of value.
We've started marketing some of these assets already.
We've toured some new operators through some of the properties that may want to re tenant it will.
Kind of be going to parallel path, there because there might be an opportunity to start a new relationship that we're excited about with some of these instead of selling them.
And we are also in this time vetted this new behavioral health operator.
LOI stage with them negotiating leases and doing the preliminary diligence with them.
But because we're mostly at LOI stage in lease negotiation stage.
It's impossible to determine the number that we.
Will be sold versus retained.
But I.
I think it's safe to say that we would assume in a normal circumstances again.
Not another.
Curve ball variance by Covid that could sidetrack this.
But the sales would probably be executed by closed by sometime this summer.
And if we're going to retain any and re tenant them for this similar use we'd probably get that done inside of that time.
And then for Repurposing thats going to be like I said earlier about a 12 to 18 month process.
Depending on whether or not.
Operating company is already within that state and other permitting and licensing nuances.
Thanks, and one last question for me incur further pipeline do we do have of your bread and butter.
Acquisitions can you give us any sense of yield expectations.
We're underwriting coverages here.
Yes.
It's a complete mixed bags.
I would say yields are kind of in the.
Kind of.
Mid.
It's a high eights on.
Smith and some in some instances kind of low nines.
Sort of depends on state.
In asset.
And then.
And then on the seniors housing side.
Again sort of the.
Kind of a mixed bag.
Low eights.
And then on coverage.
Depending on.
Depending on the asset we're still underwriting to like 112 to $1 25 for seniors housing and skilled nursing, we always start kind of at the in.
In the one four range.
Obviously, there is some secret sauce to to the underwriting.
We look to do in terms of day, one changes that can take place.
100, <unk> still our target.
Underwriting coverage for skilled nursing.
Thank you good luck.
Thanks.
Our next question comes from Jordan, Saddler, with Keybanc capital markets.
Thanks.
Good afternoon everybody.
Dave I just had one.
Question on <unk>.
What took place basically between.
Vince.
You guys last reported today and specifically its sort of a fundamental question.
You commented in the release that your operators have shifted to often to be part of the solution to treat COVID-19 patients.
And while we discuss the impacts of labor incentives.
Curious if the <unk> variant also happened to cause an uptick in skilled mix in late December and through January .
That's been seen in prior Covid spikes and you guys have talked about.
Yes.
That has happened omicron, we have seen this.
The occupancy data that we get is.
Really a few conversation in E mail and things like that.
Change once those financials get here, but they've largely been in line and you are exactly your hunches exactly right Omicron has.
Improved skilled mix.
For several of our skilled nursing operators.
Unfortunately, it's also caused quite a bit of.
Increased the labor costs because.
Those probably most affected.
By Omicron in the facilities have been the employees.
Not to say that the residents haven't been affected but the.
To the operations.
Caused wide infection rates among employees, which has caused.
Increased usage of agency in overtime and things like that and so that that improved skilled mix.
Not exactly translate into margin.
Got it that makes sense.
And now I, just want to come back to.
Well sort of asset management in Denver.
I'm struck by is covered you guys for quite a while now and I guess the thing I'm struck by.
And you mentioned that some of these tenants have been in the last calls for so long.
When we strip all that came in because I remember just before the pandemic.
Eyes.
No.
I think endeavored to.
Do a similar type of.
Spring cleaning I believe you called it at the time.
And at that time, you were dealing with Trillium in southern Ohio.
And central Ohio priority life care was replaced with noble at 70 facilities met Shawn.
<unk>.
It was a bit of blow up if I recall and so.
There was a lot that went on and then in the context of that spring cleaning.
The idea was to.
Really de risk and.
The portfolio.
Positioning the company.
Much better heading into 2020.
And so I think a lot of that stuff did take place.
Okay.
Yes.
What are what is it now and who is not on the watch list.
Or who is on the watch list and then that didn't get dealt with.
That now has to be dealt with or is it a lot of these same properties and issues that just never.
We are appropriately fully felt.
At that time.
Yes, I think that.
The asset management work that we did towards the end of 2019.
And the Derisking of the portfolio.
Is exactly the work that has.
Enabled care trusts to collect 100% of rents.
For the last two years.
If we had not done that work in 2019, then we would not have had.
<unk>.
The performance that we have had through the pandemic so far.
The term watch list is a pretty.
Artful term that can mean different things to different people.
If youre transitioning buildings.
You might put them on a watch list just their performance is poor you might say they are on our watch list.
And so.
So there are folks that back in the end of 2019.
Even after the Derisking activities that we did.
Still were.
Needing to watch closely and make sure that they were going to be able to.
To be successful going into the pandemic I would say that.
We felt really good.
The state of the portfolio.
And when the when the pandemic hit.
Because of the confidence that we had had.
And the work that we had done in 2019. That's also why we were the only health care REIT.
To keep guidance in place for 2020 in 2021.
It comes due.
The reality is pun intended.
The immunity that we've had to Covid is has waned.
And as the Delta variant.
The labor situation in Micron has had.
We have become a reality.
There are those that.
We're.
Call. It on our watch list beforehand or at the time of the transition or the Chinese the pandemic.
We feel now.
As a risk of default in the future that wed like to take care of proactively now in addition to the folks that we're really having to react to here in January .
Okay.
I can appreciate that.
<unk>.
Obviously had an impact from that.
Operations.
Thanks, guys.
Just one last follow up for bill not to leave you out.
Non routine transaction costs Bill.
Just the overall elevated G&A outside of the accelerated amortization of stock based comp.
Is there can you speak to the cause of the non routine transaction costs.
Did you guys go.
Page bankers reported or was there a process run of some sort of is this more related to the transition.
Teamwork.
Jordan This is Dave I'll take that.
So those charges.
That you see there relate to strategic alternatives for the company that management and the board considered in the quarter.
And after fulfilling our fiduciary responsibility on that front.
What I can tell you is that we do not expect to incur similar charges. This year.
It's business as usual for for the team.
Any other color on that process.
What the yield is.
Okay.
No.
All the color I can give you on that.
Thanks for that.
You bet.
Our next question comes from Michael Carroll with RBC capital markets.
Yes, thanks, Dave how comfortable are you with the size of the repositioning plan I mean, do you think that the company might need to expand that above and beyond the 32 assets that were identified.
That's a fair question.
I think what I would say to that Michael is that.
In the year of Covid.
Pretty dangerous to never say never but we do feel.
We do feel really good with the asset management plan that we have we feel good about the ability to collect rents.
On.
The remaining portfolio long term.
And.
Yes.
We're trying now to take care of the cracks in the foundation that we can see out in the future. It can't promise that there won't be a surprise, but we think we have.
<unk> got a pretty good handle on it.
Okay, and then what's the expected run rate, we should expect for cash collections going forward is that 93% in January is that a good a good base that we should think about or could it dipped down to 90% to reflect all 32 of the assets here in the near term.
No.
At this point given.
Where we are in the process, we probably couldn't give you much in terms of color there.
Okay.
And then I guess, just one for mark on the investment market I know that you've been kind of saying for the past several quarters that private market valuations are pretty frothy.
But if new product comes to the market you think that valuations could normalize I know you and some of your peers are bringing assets to the market.
Has that process started have you start to see valuation is starting to normalize or if so when do you think that could occur.
No I think I think valuations are arent as high today as they've ever been.
I think I think certainly as more opportunity to hit the market I think.
The biggest constraint too many buyers is having an operator.
Certainly there are.
Private buyers that owned real estate and also had their hand in an operating company and they are in.
Pretty good advantage to be able to take down the real estate and operations all in one fell swoop.
But.
I think if I had a crystal ball I would say kind of later in the year I think.
Things start to normalize in.
Especially as.
As labor.
Hopefully.
Darts to starts to normalize.
And.
More mom and Pops come off the sidelines and start to sell you were obviously seeing some of the <unk>.
Selling off non strategic and kind of non strategic assets and relationships as well so.
I think it's going to I think it will stay on.
As long as HUD rates stay down stay low.
The market will continue to have aggressive pricing lenders are.
Our out there lending at 85% loan to cost and there is a huge appetite for operators to take on that kind of leverage and pay up for assets.
I think we historically have.
Yes.
Bought a lot of assets off.
Off market through relationships.
<unk>.
I think I think.
We feel pretty good about being able to to do that what the ultimate number will look like at the end of the year.
Necessarily have visibility on that but.
I think.
I think the market will.
It'll be interesting to see I think pricing is going to be high definitely in the short run.
But it depends on how many how many operators run out of runway when.
Especially the stimulus is not what most were expecting.
Obviously, the more that come to market will sort of Dolby.
On a per bed basis.
And that certainly could happen.
Okay, and then just last one from me on the behavioral transition that's planned or I guess could potentially happen I think you said it was going to take 18 months. So if that occurs we will not we will care trust knock it ran on those assets for 18 months is that a good way to think about it.
Yes, that's right, but it's really 12 to 18.
The trigger there is whether or not the behavioral health operator is already in the state so they're already in the state it takes it will.
Ballpark 12 months, if it's a new state for them, we would think 18 months.
And then how much does it cost to renovate that.
Completed a reverse.
It completely depends on the.
The scale of renovations needed some are some require maybe.
$1 million or two others might require three four just really depends on what's needed.
Okay, great. Thank you.
You bet.
Our next.
Comes from Kannan <unk> with Brandenburg.
Thanks again.
And have a broad based question here and I'm going to try to zero in on how it relates to your portfolio book.
To start given this disruptive environment do you get the sense that some of the stronger operators in any given region are able to step in the fold and expand their operations within some of these distressed facilities and then.
Second to that within this potentially.
Potentially reposition portfolio you've identified.
Is it a likelihood or possibility that we see an operator, maybe ensign or something similar.
That would take up operations within these particular facilities.
Well I'd say that.
The first part of your question, Yes, I think the pandemic has shown us that.
It's really magnified the strengths and the weaknesses of operators and those who were very strong leading into the pandemic.
For a host of reasons I think have done really well.
And those were.
More.
On the margins have have really struggled.
Yes, I would.
I think that big.
Hey, guys, who have been strong before and during the pandemic will be those who are able to capitalize on.
Assets that come to market during this time.
In terms of re tenant team these 32.
All options are on the table.
For for that.
As we sit here today.
<unk>.
I would guess that we would sell a majority of the 32.
Re tenant to repurpose.
Minority of those.
But.
How that plays out is to be determined and we'll we'll update you as we have information.
Got it thank you.
Yes.
Our next question comes from one center <unk> with BMO capital markets.
Hi, sorry, just wanted to follow up on Jordan's question.
Are the 32 assets.
Actual assets themselves repeat offenders.
I guess the underlying question would be is it more of the asset rather than the operator.
Just curious on your views there if there is kind of just compared real estate kind of obsolete at this point.
Yes, it's pretty difficult to separate.
The.
The facility from the operator as we look at.
Continuing on with folks so.
I wouldn't really make a distinction on that front.
Okay and then.
Just on the leverage front you mentioned the buyback is a tool curious if you can give us any sense of course.
<unk> around.
Quite you're fine.
Stock compelling and if you were to use the buyback.
Once you from that.
Positions or would you be willing to take on leverage to do so.
You want to take that.
So.
So it's a bit tricky to talk about.
At what price our company is willing to pull the trigger on a repurchase program.
And so we probably won't give you much guidance on that besides talking about it being a function of.
<unk>.
Where we feel like that is and if we get to a situation where.
We're at a.
And thats sort of a discount to that.
We would.
We would be probably pretty eager to to pull that lever.
And the use of leverage to do so.
No I don't think we would need to do that.
Given the fact that we have the proceeds coming in.
<unk>.
It's all going to be dependent on timing.
Bill you want to.
Add anything to that.
Yes.
And then just one last question for me.
Any.
Comments, you can make about your views on the dividend.
Thanks for not that may be given.
The quantum of what Youre looking to fluctuate.
Yes were not were not concerned about the dividend.
We don't make decisions about.
How much were going to increase it until March.
So you can.
Can anticipate our decision on that front.
Thank you.
Thanks, Ron.
And I'm not showing any first liens at this time I'd like to turn the call back over to Dave Sedgwick, President and CEO .
Well. Thank you, we're really grateful for the attention and the questions grateful.
Especially to all of our shareholders.
Shareholders for the long time support.
We're excited for what this year brings with that we will.
Goodbye.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Okay.
[music].
[music].
[music].
Ladies and gentlemen, thank you for standing by and walked through the characteristic REIT fourth quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to turn.
Nicole over to your host Lauren Beale characterize senior Vice President Controller, you may begin.
Thank you and welcome to <unk> fourth quarter 2021 earnings call.
<unk> expense should be aware that this call is being recorded and listeners are advised that any forward looking statements made on today's call are based on management's current expectations assumptions and beliefs about characterize business and the environment in which it operates these statements may include projections regarding future financial performance dividends acquisitions investment return fine.
Dancing and other matters and may or may not referenced other matters affecting the company's business, where the business is in its tenants, including factors that are beyond their control such as natural disasters pandemics, such as COVID-19, and governmental actions the company's statements today and its business generally are subject to risks and uncertainties that could cause actual results to materially.
Really differ from those expressed or implied herein.
You should not place undue reliance on forward looking statements and are encouraged to review characterize SEC filings for a more complete discussion of factors that could impact results as well as any financial or other statistical information required by SEC regulation G.
Except as required by law characterize REIT and its affiliates do not undertake to publicly update or revise any forward looking statements where changes arise as a result of new information future events changing circumstances or for any other reason.
During the call the company will reference non-GAAP metrics, such as EBITDA, <unk>, and F&B or Fad and normalized EBITDA <unk> and F&B 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.
Yesterday <unk> filed its Form 10-K , and accompanying press release and its quarterly financial supplement each of which can be accessed on the investor Relations section of characterize website at Www Dot care Trust REIT Dot com a replay of this call will also be available on the website for a limited period.
On the call. This morning are Dave Sedgwick, President and Chief Executive Officer, Bill Wagner, Chief Financial Officer, Mark Lamb, Chief Investment Officer, and Eric Gillis Senior Vice President of portfolio management and investments I'll now turn the call over to Dave Sedgwick, Tetra, Reese, President and CEO Dave.
Thanks, Lauren and good morning, everyone.
Like to start with the tip of the hat to our executive Chairman Greg safely.
All of US here and those associated with Kerr Trust Express our deep appreciation for his leadership.
During our first seven and a half years as our CEO .
He put this team together and took what was a highly levered spinoff with one tenant and grew it into one of the top performing health care Reits over the last seven years, producing north of 150% total shareholder return at the time of his church mission was announced in December .
With one of the strongest balance sheets in the business.
We wish him and his wife Debbie the best of luck in the next chapter of their lives.
Turning to the quarter, we're pleased to report 100% of contractual rents collected in the quarter, including the complete repayment of the one deferrals granted last year, making the full year's collections also 100%.
The fact that we collected 100% of contractual rent over the past two years is a testament to the quality of our investments our operators and our team's ability to manage needed changes in the portfolio efficiently.
Despite the track record of strong returns since our inception. It has certainly not been all smooth sailing.
The team we have in place today has overcome several challenges over the years from some operators hitting the wall to strong competition for growth to changes in the regulatory field to play to a long running pandemic.
We have previously reported quarter over quarter occupancy recovery in skilled nursing, while seniors housing had remained flat and.
In the fourth quarter, we saw occupancy flattened across both asset classes in the latter part of the quarter.
Our portfolio was not immune from <unk> impact on employee infection rates and limitations on admissions.
We've repeatedly reported that a few of our operators have needed provider relief funding to mitigate the effects of COVID-19 on their operations.
Late last quarter.
<unk> HHS phase four provider relief disbursement provided insufficient runway for the soft landing we hoped for for a couple of our operators.
The resulting in 93% of contractual rent collected in January .
Throughout the pandemic, we have conducted stress tests of the portfolio and identified a handful of operators and properties that we believe pose an unacceptable risk of default as provider relief measures and.
For these relationships and properties, we've decided to take advantage of the frothy sellers' market and proactively remove these cracks and the associated uncertainty from our foundation as quickly and efficiently as possible.
We have begun to pursue the sale re tenant teen or repurposing of up to 32 assets, representing approximately 10% of contractual rent.
We do not intend to play the defer and hope game with operators or properties that have been on our watch list since before the pandemic.
Rather we intend to take advantage of the seller's market redeploy any proceeds into new investments underwritten for today's realities and use this time to upgrade the risk profile of our growing portfolio.
Given the early stage of this plan, we will postpone guidance until we've made meaningful progress and will provide business updates along the way.
It is a seller's market today and yet we still do see opportunities to deploy capital this year.
Mark will expand on our investment outlook for the year, but I'll highlight a few things first.
We intend to take a small part of the 32 assets I mentioned and repurpose those into behavioral health facilities. We've been looking at this asset class three years and are thrilled to have found a proven operator, we're excited about and an entry point with some of our very own properties to convert into a higher and better use.
This will be a powerful new asset management tool to prune and strength in master leases in the future and it provides the company with the new growth vertical as well.
Second Mark will talk about an exciting new partnership with one of the industry's most respected lending teams, allowing us to continue to participate in the stories of some of the best operators in the business.
And for my last point on capital deployment.
Our stock repurchase program was approved in 2020 and is a significant lever available to us if the opportunity ever presented itself.
We should look back on 2022 as a pivotal year in our history.
Wherein we took the measures to deal with chronic watch list properties and reinforce our foundation to stand the test of time.
Whereas enthusiastic as ever about our expanding mission of matching high quality operators with great skilled nursing seniors housing and now behavioral health opportunities for many years to come.
With that I'll turn it over to Mark.
Good morning in Q4, we bought to seniors housing assets in New Jersey for $12 4 million. This acquisition brought our total investments in 2021 to approximately $200 million.
Looking at the pipe, we currently sit in our customary $75 million to $100 million range. The pipe is made up of singles and doubles predominantly snips with a few senior housing assets in there.
As Dave discussed we are excited about partnering with a leading lender in this space to fund a variety of loans, which we anticipate will lead us into markets and.
And operators, we have targeted for growth.
Looking at the market pricing on nursing homes has never been more robust. This we believe is due to a few things first there is not a significant amount of supply on the market. So everything that comes to market, especially if it's a portfolio of size gets bid up significantly.
Second there is a ton of private liquidity looking for deals that they can bridge to HUD.
Third many operators have figured out how to manage through Covid, that's come out on the other side stronger and more efficient.
Lastly on the senior housing front, we are seeing every type along the spectrum of stable and well performing to turnaround situations to buildings that are really struggling.
But we continue to underwrite and size opportunities for us and our operators in the senior space and hope to find a few nuggets.
In the in the coming quarters.
Looking forward, we anticipate the tight supply I mentioned above to loosen the investment sales community continues.
To provide record numbers of opinions of value to existing owners, who are considering selling we are cautiously optimistic that the reality of stimulus join up and a tighter than ever labor market will force owners into selling their assets in the meantime, we continue to work with the brokerage community to find deals that fit with us and our.
Operators continue to rundown off market leads that you have grown accustomed to seeing us close on each year. Please.
Please remember that when we quote our pipe we only quote deals that we are actively pursuing under our current underwriting standards and then only if we have a reasonable level of confidence that we can lock them up and close them in the relatively near term.
And now I will turn it over to bill to discuss the financials.
Thanks, Mark for the quarter normalized <unk> grew by 9% over the prior year quarter to $37 3 million.
Normalized <unk> grew by 11, 5% to $39 8 million.
On a per share basis normalized <unk> grew by eight 3% over the prior year quarter to 39 per share normalized <unk> grew by 10, 8% to <unk> 41 per share.
Our liquidity remains extremely strong with approximately $13 million in cash and $510 million available under our revolver.
Leverage also continues to be strong at a net debt to normalized EBITDA ratio of three seven times.
Net debt to enterprise value was 23% as of quarter end and we achieved a fixed charge coverage ratio of eight seven times.
Cash collections for the quarter came in at 100% of contractual cash rent in January came in at 93%.
During currently stands at 92%.
As Dave previously mentioned, we are postponing issuing guidance for 2022 until the picture gets a little more clear on the timing of the sale re tenant in a repurposing of up to 32 assets as soon as this becomes clear we will put this out in the meantime, we will be putting out announcements as we make material progress.
And with that I'll turn it back to days.
Thanks Bill.
So we hope this discussion has been helpful and thank you for your continued support and with that I'd be happy to take questions.
Ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the queue. Please press the pound key.
Our first question comes from Steven Valiquette with Barclays.
Hi, Thanks.
Good morning, and good afternoon, and thanks for taking the question I guess I was curious to hear more about the.
The opportunity on the behavioral health side.
A couple of questions around that first of all just curious to hear more about the pipeline of opportunity we've seen a few other.
Health care rates also.
Ill attempt to diversify into that space.
But also.
As far as any licensure as far as conversion of facilities curious hear more about that process, whether that is something that can happen quickly or is that a lengthy process just more color around the nuts and bolts of the can.
Those conversion opportunities as well.
Great. Thanks, Steve.
I'll take it.
Mark.
Correct me, where I go wrong, so its behavioral health, we like it for a couple of reasons.
And one is offensive and the other is defensive.
On the offensive side.
There is a lot of.
A lot of productivity in the market right now that is fairly distressed and that's not normally.
The place that we like to play.
But if we can pick ups.
Really distressed assisted living and skilled nursing facilities at a good price.
And underwrite that along with the behavioral health operator.
And then take that and repurpose that for behavioral health that could be an interesting way to grow.
For Mark and his team for new investments.
But from an asset management perspective.
There is some select opportunities here, where that really makes a lot of sense. For example, if you have a portfolio a master lease that has really weighed down by one or two buildings with negative EBITDAR and if you can remove that from the master lease strengthen that tenant.
That remains with you and converted into a behavioral health.
That seems like a no brainer.
Especially if the yield that you'll get from that asset as competitive if not better than what you would get from re tenant teen or redeploy sales proceeds.
And that's really what we've been looking at here, that's how we're starting <unk>.
You look at these 32 assets and you say, okay, which of these do we feel like the yields would be just as competitive with behavioral health that will start this relationship for us.
And an area that we've been looking at for quite some time.
And then it really to your question of licensing in the nuts and bolts.
Each state is very different.
It feels like maybe the nursing home industry did 30 to 40 years ago in terms of regulations.
And.
Licensing requirements.
But each state is different.
And from a timing perspective, we would expect.
12 to 18 months.
From signing the lease to redevelop the asset to getting zoning in licensing and permits done by <unk>.
Until that.
That rent will come online.
Okay. That's helpful. The only quick follow up is just from like a 10 31 exchange perspective should we assume that.
Whatever assets might be divested in the current portfolio. This year that from <unk> to 1% that most of the replacement would probably be on the behavioral health side is that just the right way to think about it for now or could there be some deviation on that like you said with other opportunities either in senior housing or even maybe a few MBS sniff side as well.
No thanks for asking that.
As you think about new investments for care Trust this year.
I think the right thing the right way to think about that is that we will very much look this year like we had last year in terms of asset classes.
And that our entry into the behavioral health will most likely be from Repurposing our own facilities. Among these 32.
In the future Thats not to say that in the future we will become more active in behavioral health, but thats, how you should be thinking about how we will start it off.
Okay, alright, thanks for the clarity on that okay. Thanks.
You bet.
Our next question comes from Congress of Ischemic Brennan Berg.
Hi, everybody. Thanks for having me on the call so.
Just to dig.
Dig a little more into the sales of repositioning of these assets you identified I mean, you mentioned a handful of assets that could potentially be repositioned to behavioral health I mean can you provide any color as to what percentage of this.
Of this total ABR that could potentially be repositioned and then in the event that you are selling off another portion of the assets I mean, where do you where do you seek to put those proceeds is there a potential that you engage in a stock buyback program or would you look to invest in behavioral health facilities with those proceeds as well.
<unk>.
Well I'll go in reverse order I would say that all options are on the table when it comes to redeploying those assets those proceeds including behavioral health, but like I. Just said what I would expect is that you would see the redeployment of that capital into the.
Skilled nursing and seniors housing seniors housing assets as we have historically done.
Historical underwriting and the rates there.
When it comes to the percent that could be read.
Sold versus re tenanted versus repurposed at this stage were.
Reluctant.
To really say much on that because we're just not far enough along.
Particularly with behavioral health.
Unlike skilled nursing and seniors housing there is a gating item of zoning that's really important.
And.
That zoning that preliminary diligence work is being done right now.
A handful of these properties, but until we have cleared those gates.
It could be it could be none.
It could be a few it could be a handful, but until we have done some preliminary diligence on zoning, it's probably not really helpful to to guess at this point.
Okay. Okay that helps and then you had mentioned that the yields on behavioral health could potentially look similar to.
These skilled nursing facilities that may be repositioned or repurposed.
Can you give any sense of what those lease agreements could look like and then more specifically with the rent coverage metrics be similar for behavioral health versus skilled nursing as well.
Yes, so we're anticipating that stabilized lease coverage for behavioral health properties would be north of skilled nursing.
Probably north of three times coverage.
And that the the yields on and if we were to do a new investment we probably.
B and the nines as well.
Okay that helps and then just one final one just to clarify on external activity. So the agreement to invest in this variety of loan products. As you stated that that is separate from the real asset acquisitions that you could engage in 2022 as well correct.
Yeah, Hey, this is mark.
It's.
It's sort of a.
Kind of another another pipeline for us.
We.
Everything that I quoted.
And the pipe was call it our normal bread and butter business with skilled nurses.
And seniors housing on the Triple net side.
And so we've.
Discussions with this lender over over the last couple of months.
We'd expect to see opportunities crossing Argos in the coming weeks.
So but.
Yes.
We won't.
We won't veer from our bread and butter and thats investing in skilled nursing and seniors housing.
On that basis.
Okay I'll leave it there for now thank you.
Our next question comes from one central area with BMO capital markets.
Hi, good morning.
Question on the on the 32 assets, 10% of rents can you give us any sensor.
The split is between seniors and scaled.
So it's really kind of what what changed in the last three months.
You had some funds come in.
Flatlined.
But really what what got worse here, just the labor situation that kind of pushed.
Tenants over the horizon, and we're now able to collect or percentage of rents and so we think that 93 drops there.
90.
As the plant gets enacted given youre not comparable.
10% of your rent base.
Yes.
As we've been stress testing the portfolio all along the pandemic.
It really update it with.
The new information that.
Covid presents so last year, we updated our stress test.
With the impacts of the Delta variant.
We saw after delta and into Q4.
These labor costs.
Appeared to be more long lasting.
Then.
Then maybe six to nine months before that.
Going into towards the end of the year.
There was a lot of anticipation around the phase four funds.
And we knew that there was going to be another phase, but we didn't have visibility into how much was going to come.
And then you have omicron happen kind of at the same time that those phase four funds hit.
That's that's four pretty important data points.
<unk>.
<unk> impacted our stress test as we look forward and so then when January hits.
We don't collect 100% Theres certainly.
Some operators proper.
Properties and relationships that we have to deal with there, but we also factored in this updated stress test model to look beyond January and February and March.
And look more at Okay. What is what does the world look like after these provider relief measures go away.
And Thats why we Didnt, just take action or not just taken action with the properties that are.
Impacted in January , but really even with properties and relationships that are current with rent.
But we feel like there is a.
Bit of inevitability.
For risk of default in the future. According to these stress tests.
So thats Thats whats changed in our thinking is instead of playing the.
Defer and hope game with folks that have been on our watch list for so long.
It's it makes more sense to remove the uncertainty.
Thats presented by those operators.
<unk>.
Be more decisive with it right now.
In terms of the mix. It is it is a mix of skilled nursing and seniors housing.
Will.
We will update everybody on.
The specific mix as we have come to milestone agreements.
For sales and re tenanted and things like that.
And can you provide any sense of what the coverage levels may look or go from and to.
As you do this.
<unk>.
How long do you anticipate this whole process will last before we get.
Clarity on go forward earnings run rate.
Yes, so the coverage situation will improve.
All things.
Are things kind of staying the same.
In the future as we take.
Take care of these 32 properties.
And I'm happy to give kind of pro forma numbers on that as well.
We go from LOI to actual closing deals I think it would be premature to do it at this point.
But we are committed to providing those business updates along the way.
The second part of your question was what.
The timing of when you expect.
Earnings clarity and went to when this could be done.
Yes.
So.
At this point I will just give you some color about where we are and that will help.
Thank you gauge the timing of it.
We've had really productive collaborative conversations with our main operators involved in these 32 assets.
Engaged a few of the best brokerages in the business, we got their opinions of value.
We've started marketing some of these assets already.
We've toured some new operators through some of the properties that may want to re tenant it will kind of be going to parallel path. There because there might be an opportunity to start a new relationship that we're excited about with some of these instead of selling them.
And we are also in this time vetted this new behavioral health operator.
LOI stage with them negotiating leases and doing the preliminary diligence with them.
But because we're mostly at LOI stage in lease negotiation stage.
It's impossible to determine the number.
It will be sold versus retained.
But.
I think it's safe to say that we would assume under normal circumstances again.
Not another.
Curve ball variance by Covid that could sidetrack this.
But the sales would probably be executed by closed by sometime this summer.
And if we're going to retain any and re tenant them for the similar use we'd probably get that done inside of that time.
And then for Repurposing, that's going to be like I said earlier about a 12 to 18 month process.
Depending on whether or not.
Operating company is already within that state and other permitting and licensing nuances.
Okay. Thanks, and one last question for me incur further pipeline do you have of your bread and butter.
Acquisitions can you give us any sense of yield expectations.
We're underwriting coverages here.
Yes.
It's a complete mixed bags.
I would say yields are kind of in the.
Kind of.
Mid.
To high eights on.
Smith and some in some instances kind of low nines.
Sort of depends on state.
In asset.
And then and then and then on the.
On the seniors housing side.
Again sort of the.
Kind of a mixed bag.
Low eights.
And then on coverage.
Depending on.
Depending on the asset we're still underwriting to like 112 to $1 25 for seniors housing and skilled nursing, we always start kind of at the in.
In the one four range.
Obviously, there is some secret sauce to to the underwriting.
We look to do in terms of day, one changes that that can take place.
But 140 <unk> store target.
Underwriting coverage for skilled nursing.
Thank you good luck.
Thanks.
Our next question comes from Jordan, Saddler, with Keybanc capital markets.
Thanks.
Good afternoon everybody.
Dave I just had one.
Question on <unk>.
What took place basically between.
Vince.
You guys last reported today and specifically, it's sort of a fundamental question.
You commented in the release that your operators and shifted to often to be part of the solution to treat COVID-19 patients.
And while we discuss the impacts of labor incentives.
Curious if the <unk> variant also happened to cause an uptick in skilled mix in late December and through January .
That's been seen in prior Covid spikes and you guys have talked about.
Yes.
That has happened omicron, we have seen I mean the <unk>.
Occupancy data that we get is.
Really a few conversation in E mail and things like that.
Change once those financials get here, but they've largely been in line and you are exactly your hunches exactly right Omicron has.
Improved skilled mix.
For several of our skilled nursing operators.
Unfortunately, it's also caused quite a bit of.
Increased the labor costs because.
Those probably most affected.
By Omicron in the facilities have been the employees.
Not to say that the residents haven't been affected but the.
To the operations.
Caused wide infection rates among employees, which has caused.
The increased usage of agency in overtime and things like that and so that that improved skilled mix.
Not exactly translate into margin.
Got it that makes sense.
And now I, just want to come back to.
Well sort of asset management in Denver.
I'm struck by covered you guys for quite a while now and I guess the thing I'm struck by is.
You mentioned that some of the tenants have been in the last months for so long.
Stop on that comment because I remember just before the pandemic you guys.
I think endeavored to.
Do a similar type of spring cleaning I believe you called it at the time.
And at that time, you were dealing with Trillium in southern Ohio trio in Central Ohio priority life care was replaced with noble at seven facilities match on.
<unk> was a bit of.
Follow up if I recall.
So there was a lot that went on and then in the context of that spring cleaning.
The idea was to.
Really de risk in.
The portfolio.
We can position the company.
Much better heading into 2020.
And so I think a lot of that stuff.
<unk>.
Just curious.
Yeah.
What are what is it now and who is not on the watch list.
Ed or who is on the watch list and then it didn't get dealt with.
That now has to be dealt with or is it a lot of these same properties and issues that just never.
We are appropriately fully.
At that time.
Yes, I think that.
The asset management work that we did towards the end of 2019.
And the Derisking of the portfolio.
Is exactly the work that has.
Enabled characterize to collect 100% of rents.
For the last two years.
If we had not done that work in 2019, then we would not have had the.
The performance that we have had through the pandemic so far.
So the term watch list is a pretty.
Artful term that can mean different things to different people.
If youre transitioning buildings.
You might put them on a watch list if their performance is poor you might say they are on our watch list.
And so.
So there are folks that back in the end of 2019.
Even after the Derisking activities that we did with.
We still were.
Needing to watch closely and make sure that they were going to be able to.
To be successful going into the pandemic I would say that.
We felt really good.
The state of the portfolio.
And when the when the pandemic hit.
Because of the confidence that we had had.
And the work that we had done in 2019. That's also why we were the only health care REIT.
To keep guidance in place for 2020 in 2021.
It comes.
The reality is pun intended.
The immunity that we've had to Covid is has waned.
And is the Delta variant in the labor situation Omicron has had.
That would become a reality.
There are those that.
We're.
Call. It on our watch list beforehand or at the time of the transition or the timing of the pandemic.
We feel now.
As a risk of default in the future that wed like to take care of proactively now in addition to the folks that we're really having to react to here in January .
Okay.
I can appreciate that.
That obviously had an impact on that.
Operations.
Thanks, guys, maybe just one last follow up for bill not to leave you out here the non routine transaction costs Bill.
And just the overall elevated G&A outside of the accelerated amortization of stock based comp.
Is there can you just speak to the cause of the non routine transaction cost with or without.
Did you guys engage bankers as was reported or was there a process run up some sort of is this more related to the transition.
Of.
The CEO slot.
Jordan This is Dave I'll take that.
So those charges that you see there relate to strategic alternatives for the company that management and the board considered in the quarter.
And after fulfilling our fiduciary responsibility on that front.
What I can tell you is that we do not expect to incur similar charges. This year.
Business as usual for for the team.
Any other color on that process.
What the yield is what specifically.
No. That's that's all the color I can give you on that.
Thanks for that.
You bet.
Our next question comes from Michael Carroll with RBC capital markets.
Yeah. Thanks, Dave how comfortable are you with the size of the repositioning plan I mean.
Do you think that the company might need to expand that above and beyond the 32 assets that we had identified.
That's a fair question.
I think what I would say to that Michael is that.
In the year of Covid.
Pretty dangerous to never say never but we do feel.
We do feel really good with the asset management plan that we have we feel good about the ability to collect rents.
On.
Yes.
The remaining portfolio long term.
And.
Yes.
We're trying now to take care of the cracks in the foundation that we can see out in the future. It can't promise that there won't be a surprise, but we think we've.
We've got a pretty good handle on it.
Yeah.
Okay, and then what's the expected run rate that we should expect for cash collections going forward is that 93% in January is that a good a good base that we should think about or could it dipped down to 90% to reflect all 32 of the assets here in the near term.
No.
I think at this point given.
Where we are in the process, we probably couldn't give you much in terms of color there.
Okay.
And then I guess, just one for mark on the investment market I know that you've been kind of saying for the past several quarters that private market valuations are pretty frothy.
But if new product comes to the market you think that valuations could normalize I know you and some of your peers are bringing assets to the market.
Has that process started have you start to see valuation is starting to normalize or if so when do you think that could occur.
No I think I think valuations are aren't as high today as they've ever been.
I think I think certainly as more opportunity to hit the market I think.
The biggest constraint too many buyers is having an operator certainly there are.
Private buyers that owned real estate and also have their hand in an operating company and they are in.
Pretty good advantage to be able to take down the real estate and operations all in one fell swoop.
But.
I think if I had a crystal ball I would say kind of later in the year I think.
Things start to normalize in.
Especially as.
As labor.
Hopefully.
Darts to starts to normalize.
And <unk>.
More mom and Pops come off the sidelines and start to sell we're obviously seeing some of the <unk> selling off non strategic.
Kind of non strategic assets and relationships as well so.
I think it will stay on.
As long as HUD rates stay down stay low.
The market will continue to have aggressive pricing lenders are are.
<unk> out there lending at 85% loan to cost and there is a huge appetite for operators to take on that kind of leverage and pay up for assets.
I think we historically have.
A lot of assets.
Off market through relationships.
And.
I think I think.
We feel pretty good about being able to to do that what what the ultimate number will look like at the end of the year.
We necessarily have visibility on that but.
I think.
I think the market will.
It'll be interesting to see I think pricing is going to be high definitely in the short run.
But it depends on how many how many operators run out of runway when.
Especially stimulus.
What most were expecting.
Obviously, the more that come to market will sort of Dolby.
On a per bed basis.
And that certainly could happen.
Okay, and then just last one from me on the behavioral transition that's planned or I guess could potentially happen I think you said it was going to take 18 months. So if that occurs.
So you are not well characterized not get ran on those assets for 18 months is that a good way to think about it.
Yes, that's right.
It's really 12 to 18.
The trigger there is whether or not the behavioral health operator is already in the state. So if they're already in the state it takes a little.
Ballpark 12 months, if it's a new state for them, we would think 18 months.
And then how much does it cost to renovate that.
Completed a reverse.
It completely depends on the.
The scale of renovations needed some are some require maybe.
$1 million or two others might require three four just really depends on what's needed.
Okay, great. Thank you.
You bet.
Our next question comes from kind of severity with Cronenberg.
Thanks again.
Of a broad based question here and I'm going to try to zero in on how it relates to your portfolio book.
To start given this disruptive environment do you get the sense that some of the stronger operators in any given region are able to step in the fold and expand their operations within some of these distressed facilities and then.
Second to that within this.
Potentially reposition portfolio you've identified.
Is it a likelihood or possibility that we see an operator, maybe <unk> or something similar that would take up operations within these particular facilities.
Well I'd say that.
First part of your question, Yes, I think the pandemic has shown us that.
It's really magnified the strengths and the weaknesses of operators and those who were very strong leading into the pandemic.
For a host of reasons I think.
Have done really well.
And those were.
More.
On the margins have really struggled.
Yes, I would think that.
The guys, who have been strong before and during the pandemic will be those who are able to capitalize on.
Assets that come to market during this time.
In terms of re tenant team these 32.
All options are on the table for for that.
As we sit here today.
I would guess that we would sell a majority of the 32.
Re tenant to repurpose.
Minority of those.
But.
How that plays out is to be determined and will hold up.
Date, you as we have information.
Got it thank you.
Yes.
Our next question comes from <unk> with BMO capital markets.
Hi, sorry, just wanted to follow up on Jordan's question.
Are the <unk>.
Two asset.
The actual asset sales repeat offenders.
I guess the underlying question would be is it more of the asset rather than the operator, just curious on your views. There is kind of just impaired real estate kind of obsolete at this point.
Yes, it's pretty difficult to separate.
The.
The facility from the operator as we look at.
Continuing on with folks so.
I wouldn't really make a distinction on that front.
Okay and then.
Just on the leverage front, you mentioned the buyback as a tool.
If you can give us any incentives.
Emitters around.
Point, you find your stock compelling and if you were to use the buyback.
Which you from that.
As physicians or would you be willing to take on leverage to do so.
You want to take that.
So.
So it's a bit tricky to talk about.
At what price our company is willing to pull the trigger on a repurchase program.
And so we probably won't give you much guidance on that besides talking about it being a function of.
<unk> and <unk>.
Where we feel like that is and if we get to a situation where we're at.
And thats sort of a discount to that.
We would.
We would be probably pretty eager too.
To pull that lever.
And the use of leverage to do so.
No I don't think we would need to do that.
Given the fact that we have the proceeds coming in but.
It's all going to be dependent on timing.
Bill you want to.
Add anything to that no I think so.
Yes.
And then just one last question for me.
Any.
Comments, you can make about Europeans on the dividend.
How things were not that may be given.
The quantum of what Youre looking to refresh rate.
Yes were not were not concerned about the dividend.
We don't make decisions about.
How much were going to increase it until March.
So you can.
So you can anticipate.
Our decision on that front.
Yes.
<unk>.
Thank you.
Thanks Mark.
And I'm not showing any first and at this time I would like to turn the call back over to Dave Sedgwick, President and CEO .
Well. Thank you, we're really grateful for the attention and the questions grateful.
Especially to all of our.
Shareholders for the long time support.
We're excited for what this year brings with that will.
Goodbye.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.