Q4 2024 Sila Realty Trust Inc Earnings Call
Good morning, and welcome to Sheila Realty Trust's fourth quarter, 'twenty 'twenty earnings conference call and webcast all participants.
Participants you'll be in a listen only mode should you need assistance. Please signal our comprehensive specialists by pressing the star key followed by zero.
I'll now turn the conference over to your host.
Speaker Change: Let's go ahead, and senior Vice President of capital markets and Investor Relations for Sheila you may begin.
Speaker Change: Good morning, and welcome to Cielo Realty Trust's fourth quarter and year ended 2024 earnings Conference call yesterday evening, we issued our earnings release and supplement which are available on the Investor Relations section of our website at investors Dot CLO Realty Trust Dot com.
Speaker Change: With me today are Michael seating, President and Chief Executive Officer, Jay Neely, Executive Vice President and Chief Financial Officer, and Chris flow House, Executive Vice President and Chief Investment Officer.
Speaker Change: Before we begin I would like to remind you that today's comments will include forward looking statements under federal Securities laws.
Speaker Change: Forward looking statements are identified by words, such as will be intend believe expect anticipate or other comparable words and phrases statements.
Speaker Change: He misses that are not historical facts such as statements about expected financial performance are also forward looking statements actual results may differ materially from those contemplated by such forward looking statements.
Speaker Change: A discussion of the factors that could cause a material difference in our results compared to these forward looking statements is contained in our SEC filings.
Speaker Change: Please note that on today's call, we will be referring to non-GAAP measures you can find the reconciliation of these historical non-GAAP measures to the most directly comparable GAAP measures in our fourth quarter earnings release, and our earnings supplement both of which can be found on the Investor Relations section of our website and the form 8-K, we filed with the SEC.
Speaker Change: With that I will now turn the call over to our President and Chief Executive Officer, Michael Seaton.
Miles: Thank you miles good morning, and I sincerely appreciate everyone, taking the time to join US This morning.
Miles: Let me first say that I am tremendously proud of the work by the leadership team and all of my colleagues to bring about the results that we are presenting to you today.
Miles: I am pleased to report an extremely positive quarter to end 2024.
Miles: Tapping one of the most eventful years and feel its history.
Miles: Throughout the year, we were prudent and thoughtful in our investing and yet remained very proactive with our existing portfolio.
Miles: Executing over 1 million square feet of lease renewals and extensions for the portfolio.
Miles: One of the most significant lease modifications with the long term extension of our largest tenant.
Miles: With the acute medical in the fourth quarter.
Miles: We also continued to successfully position our balance sheet from both a strength of portfolio and capital perspective.
Miles: As you know by now feel are listed on the New York Stock Exchange on June 13, 2024.
Miles: And I am very proud to convey outperformed the S&P and RMC on a total return basis between our listing date in June and year end 2024.
Miles: <unk> is already realizing the benefits of our direct listing with significantly greater overall market visibility to the investor and analyst community.
Miles: We believe that our increased access to the capital markets and liquidity position.
Miles: Allow for meaningful opportunities to grow and enhance value for our existing shareholders and prospective shareholders.
Miles: Our four foot at positioning starts with the recent recast of our revolving line of credit.
Miles: With which we realized a $100 million increase in our total aggregate commitments to $600 million.
Miles: Commitments to our facility were oversubscribed by 70% and hence our decision to upsize the facility.
Speaker Change: <unk> oversubscription demonstrates the confidence that the REIT lending community Hasnt CLS strategy assets and balance sheet management.
Speaker Change: The size of the facility is expected to allow us to execute on our external growth objectives to enhance the diversity quality and size of our health care real estate portfolio.
Speaker Change: While the seemingly higher for longer interest rate environment may present challenges for some of our competitors in the market.
Speaker Change: We believe <unk> can use this time to take advantage of existing portfolio and new growth opportunities, while others sit on the sidelines.
First a lack of new health care real estate development coming online limits opportunities for existing tenants to relocate to new buildings, creating what we believe it's a stickier releasing environment.
Speaker Change: Second.
Speaker Change: While there may be more discrete limited new construction and markets that are in need of increased health care delivery.
Speaker Change: Developers and operators often need to fill a gap in their capital stack of the construction as traditional lenders remain more restricted than in a typical stabilized market environment.
Speaker Change: These situations, creating opportunity for sale with a step up and to fill the gaps in the capital stack, providing the necessary funding to allow for the construction and access to an ultimate ownership of the completed property.
Speaker Change: We took advantage of exactly this type of opportunity in the fourth quarter executing two mezzanine loans for the development of an inpatient rehab facility and a behavioral health care facility in Lynchburg, Virginia.
Speaker Change: Which include the purchase options at seal as election for each facility once they are completed.
Speaker Change: We believe these loans earn outstanding use of steel with capital, providing a mid teens return during the development and funded period.
Speaker Change: And the opportunity to acquire brand new built to suit healthcare facilities upon completion with long term leases with investment grade health care sponsorship.
Speaker Change: We are seeing more types of these types of opportunities arise through our relationships with developers brokers and some of the largest health care operators in the U S.
Speaker Change: And we look forward to increasing returns and growing our pipeline with these types of transactions.
Speaker Change: We remain very enthusiastic about our investment thesis targeting high quality health care facilities.
Speaker Change: Strategic locations leads to reliable tenants in a geographically diverse manner.
Speaker Change: Beyond the mezzanine loan activity in 2024, we acquired over $164 million of accretive investments, which included eight assets all fit the anatomy of our ideal property.
Speaker Change: These transactions reinforce the effectiveness of <unk> capital allocation strategy and the belief in our long term goals.
Speaker Change: We believe that the ultimate tailwind the aging U S population.
Speaker Change: Third with our 99, 9% net lease structure set <unk> apart from the rest of the REIT space and will allow for outperformance over time by having long predictable durable income streams supported by underlying businesses, which are growing.
Speaker Change: Pivoting to tenant operations.
Speaker Change: Overall, our portfolio showed improved EBITDAR coverage ratios over the prior quarter and demonstrated in increasing upward trend.
Speaker Change: And we now have less than 2% of our ABR with an EBIT darn coverage ratio that is less than one times.
Speaker Change: Down from third quarter of four 5% of ABR.
Speaker Change: There were only three tenants at two properties with EBITDAR below one point other times in the fourth quarter versus six tenants spread across nine properties in the third quarter.
Speaker Change: Significant improvement quarter over quarter.
Speaker Change: Also our overall portfolio EBITDAR coverage ratio for the fourth quarter improved to five three times signifying we believe.
Speaker Change: Our tenants still in navigating the healthcare operating environment.
Speaker Change: Since the fourth quarter of 2023, we increased exposure to investment grade and rated tenants.
Speaker Change: Guarantors or affiliates to 66, 9%.
Speaker Change: We take an active and engaged approach to continually monitor the financials and credit worthiness of our tenant base.
Speaker Change: We're very pleased with the improving trends in our portfolio that we have seen throughout the course of the year.
Speaker Change: Well, we were faced with the bankruptcy of two tenants in our portfolio in 2020 for Genesis care and Stuart.
Speaker Change: We successfully resolved all of our Genesis care exposure by re leasing leasing or selling all 17 assets owned by US we successfully resolved. The final two remaining vacant properties that were formerly leased to Genesis care in December 2024.
Speaker Change: By selling one and leasing the other to an investment grade rated tenant for 10 years.
Speaker Change: Our only exposure to storage bankruptcy has been a single property located in Stoughton, Massachusetts, which we are actively marketing for sale or lease through a national broker.
Speaker Change: And which we feel confident about the progress.
Speaker Change: Since our listing our shareholder base has changed materially, particularly with seal of being added to certain indices, including the S&P total market.
Speaker Change: Chris U S total market the FTSE NAREIT the S&P completion.
Speaker Change: The MSCI U S IMI real estate 25, 50, and most recently the RMC with.
Speaker Change: These additions we have seen our shareholder base become more institutionally diversified and trading volumes have increased.
Speaker Change: This momentum should continue as we expect to be added to other indices this year, including the Russell 2000.
Speaker Change: We believe that over 50% of our initial 100% retail shareholder basis turned over which compares more favorably to other Reits that have entered the publicly traded REIT market in a similar manner to us.
Speaker Change: I confidently convey to you that the team's hard work paid off with tangible results in 2024, and I am excited to continue to have the opportunity to demonstrate to you that we can carry this positive momentum into the future.
Speaker Change: Our REIT industry, leading balance sheet, we will continue to be the foundation of our long term success as we search out and find the best risk adjusted returns in the property market.
Speaker Change: I would say with the greatest in theory. We appreciate all of you have already joined us as shareholders of our company.
Speaker Change: We have enjoyed getting to know a large number of <unk> for the first time over these last several months and.
Speaker Change: And we look forward to expanding on all of our existing and new relationship for years to come.
Speaker Change: 2024, it's been a memorable year filled with significant milestones in our CLO team is beyond enthusiastic to continue executing our growth strategy in 2025.
Speaker Change: Now Chris will provide more details on the activity in our portfolio.
Chris: Thank you Michael and good morning, everyone.
Chris: <unk> 2024 operating results were highlighted by robust renewal demand and improving tenant fundamentals across the board.
Chris: We executed a renewal leases and lease modifications for in excess of $1 1 million rentable square feet, which represents approximately 20% of our total real estate portfolio over the course of the year extending many of our partnerships with some of our largest tenants.
Chris: There are certain leases in the portfolio reset to fair market value of exploration, which in turn reduced the ABR at these properties. These resets were agreed to by US in exchange for longer lease terms with compounding annual rent Escalations that will benefit the company in the long run.
Chris: In the fourth quarter, we renewed all 15 of our leases with our largest tenant post acute medical extending each of their remaining lease terms to 20 years with no change to base rental rates. We believe this is a testament to our strong relationship with post acute medical like many of our tenants demonstrating their commitment to this.
Chris: Facilities and our joint investment in the successful operation at these properties. These renewals along with others extended I'll walk by approximately one and a half years to nine seven years at year end.
Chris: Combined with our weighted average annual contractual rent increases of two 2%, thus positioned seamless portfolio for consistent internal growth for a long time to come.
Chris: Entering the fourth quarter, we had two former Genesis care properties remaining on December 10th we sold the Yucca Valley Health care facility for $1 $7 million. Just days later on December 13th we entered into a long term lease with the regions of the University of California at investment grade rated tenants at the LLC.
Chris: Health care facility. These two successful transactions concluded that selling our re letting of all former justice care properties. The outcome highlights our ability to move swiftly and creatively should there be weakness with a tenant at one of our properties.
Chris: As it pertains to our former steward asset Stoughton, Massachusetts, we are actively marketing the property and have hired a national brokerage firms to help us facilitate the sale or leasing of that asset in an expeditious manner.
Chris: At the end of the fourth quarter, our portfolio weighted average lease rate increased 50 basis points to 96% compared to $95 five at the end of the third quarter driven largely by the resolution of the final two Genesis care properties.
Chris: After the planned sale of the Stoughton property, which accounts for approximately three 4% of the square footage in our portfolio. This number is expected to increase to be more in line with our historical level of over 99%.
Chris: Perhaps more importantly, the strength of our tenancy and place increased throughout the year of our tenants are guarantors, who report financials to Sheila which accounts for approximately 72% of our in place ABR, we saw meaningful increases in EBITDAR coverage ratios to a weighted average of five three times all.
Chris: Three of our property subcategories medical outpatient buildings in patient rehab facilities and surgical specialty facilities realized improvements in their financial results.
Chris: It is important to note that up to be approximately 28% of our obligor that do not report financials, approximately 17% or two thirds of those are associated with an investment grade rated tenant guarantor or sponsor.
Chris: In our disclosures you may also notice that only one 8% of our ABR comes from reporting albacores with EBITDAR coverage ratios below one times down from the four 5% last quarter, leaving only three oblak worse in this category. We're pleased by the direction in which our tendency is headed and we are excited to continue to bill.
Chris: Upon these positive fundamentals going forward.
Chris: Turning to external growth in 2024, we closed on approximately $164 million of acquisitions highlighted by the $85 8 billion dollar portfolio acquisition.
Chris: A five class a health care facilities in the first quarter and.
Chris: In the fourth quarter as previously disclosed we closed on the two mezzanine loans one for the development of an approximately 62000 square foot inpatient rehab facility and the other for the development of an approximately 60000 square foot behavioral hospital, both of which are 100% pre leased to a dominant investment grade rated regional health.
Chris: Carrier systems and nationally recognized operator.
Chris: This $17 5 billion combined mezzanine loan investment.
Chris: <unk> purchase options for each facility at accretive pre negotiated cap rates as Michael mentioned earlier, we believe in appropriate capital allocation to development funding as we could realize a solid return during the construction period and enhance our future acquisition pipeline with options to purchase these high quality facilities at completion.
Chris: There is an option to ownership at the end of the deal structure like these we will gladly evaluate more transactions like these in the future.
Chris: Looking ahead, we continue to see attractive opportunities across the continuum of care.
Chris: Not as much as we likelihood given the higher for longer rate environment, which we currently find ourselves however relative to the last two years, we do see a pickup in volume and the number of potential transactions that we're able to underwrite both on and off market.
Chris: Particularly focused on opportunities within the sunbelt or the smile states as we like to call them, but we look at all opportunities with strong sponsorship across the U S. We continue to feel encouraged by what we see in the transaction market today and remain confident that our team will continue to exercise diligence as an active and thoughtful buyer.
Chris: And the market transacting on opportunities that are expected to be accretive to both earnings and the quality of the portfolio I will now turn to K for a discussion of our financial performance.
Speaker Change: Thank you, Chris and good morning, everyone.
Speaker Change: Throughout the year, we executed on many accretive transaction that resulted in positive momentum in our financial.
Speaker Change: However, some of this was offset by events that took place in late 2023 and enter 2024.
Speaker Change: Our GAAP net income for the year ended 2024, with $42 7 million or <unk> 75 per diluted share compared to 24 million or <unk> 42 per diluted share for year ended 2023.
Our cash NOI was $41 million for the fourth quarter as compared to $42 8 million for the same period in 2023, <unk> a decrease of four 3%.
Speaker Change: This was driven by the timing of our net investment activity. After the sale of a significant asset in December 2023, as well as sales of property in 2020 for the amended master lease with Genesis care.
Speaker Change: Closing of the former steward property and the decrease related to certain amended leases at lower rental rates in exchange for extended lease terms.
Speaker Change: This was partly offset by increases in our other same store property of approximately two 4% over the fourth quarter of 2023.
Speaker Change: Cash NOI was $168 6 million for the year ended 2024, or three 6% decrease from $175 million for 2023.
Speaker Change: This is a result of the items previously described as well as a decrease in lease termination fee income the cash NOI decrease was partially offset by a severance payment received in exchange for amending the Genesis Kelly.
Speaker Change: An increase in same store cash NOI, excluding Genesis care and steward of approximately two 3% in 2024, largely driven by our annual rent escalators.
Speaker Change: Total same store cash NOI increased 1% year over year.
Speaker Change: The disposition of a significant asset in December 2023, and with impactful to our non same store cash NOI year over year as we deployed the proceeds throughout 2024 as we discussed on our third quarter earnings call. We used the net proceeds of the significant asset sale to reduce the company's variable rate debt acquire.
Speaker Change: Accretive real estate at higher cap rates relative to the sales cap rate and to fund a modified Dutch auction tender offer that concluded in July 2024.
Speaker Change: All of which were accretive to the company.
Speaker Change: Our <unk> was $30 2 million or 54 per diluted share during the fourth quarter compared to $32 7 million or <unk> 57 per diluted share during the same period in 2023.
Speaker Change: For the year ended 2024, <unk> with $131 1 million or $2.31 per diluted share compared to $132 7 million or $2 32 per diluted share for 2023 or a decrease of one cent per diluted share.
Speaker Change: This is a result of the cash NOI items previously described.
Speaker Change: Partially offset by the positive impacts of redeploying some of the proceeds from the sale of the significant asset in 2023 to pay down variable rate debt, resulting in lower interest expense as well as the repurchase of our shares should the modified Dutch auction tender offer.
Speaker Change: Turning to our fourth quarter capital markets activity on December 31, 2024, we had five interest rate swaps mature with an aggregate notional of $250 million in preparation of these maturity we entered into forward starting swaps on November 27, 2024 and December six 2020.
Speaker Change: Four with aggregate notional gonna have a $150 million and $100 million respectively.
Speaker Change: These four swaps were effective on December 31, 2024, and mature on March 22029, coterminous with our $250 million term loan inclusive of the 212 month extension options available to us.
Speaker Change: The maturing swaps had a weighted average fixed rate of <unk>, 93% and the new swaps had a weighted average fixed rate of 376% or an increase of 283 basis points.
Speaker Change: We knew this interest rate reset was coming we are pleased with where we executed. These hedges in comparison to where rates are currently and are expected to be for the foreseeable future.
Speaker Change: Subsequent to year end on February 18th 2025, we closed on our new $600 million revolving credit agreement, replacing our prior $500 million revolving credit agreement that was due to mature in February 2026.
Speaker Change: Successful recapped in this transaction, resulting in significant oversubscription allowed us to increase the initial size of the facility by $100 million, providing additional runway for sealer to execute on our near term external growth objectives.
Speaker Change: This revolving line of credit provides the capacity to lever up to our desired long term net debt to EBITDA or a range.
Speaker Change: At four five times to five five times that we may run lower or we may run higher at times.
Speaker Change: Through future accretive transaction.
Speaker Change: That fit feel as investment thesis.
Speaker Change: With a net debt to EBITDA ratio of three three times at year end, we believe maintaining a strong and load a moderately leveraged balance sheet financial flexibility and ample liquidity is the hallmark of a strong sustainable REIT.
Speaker Change: Particularly in the current environment, which continues to bring uncertainty around inflation interest rates.
Speaker Change: Political pensions et cetera.
Speaker Change: We appreciate our lenders enthusiastic support and belief in steel as long term strategy. As these partnerships are important to our ability to make accretive transactions and ultimately bring greater value to our shareholders.
Speaker Change: On October 18th 2024, the board approved a change in the frequency of the company's distributions to stockholders from monthly distributions to quarterly distributions effective in 2025.
Speaker Change: This change saves the company money and time related to the processing of more frequent dividend and allows us to better align the dividend payments with quarterly company financial performance.
Speaker Change: On February 25, 2025, the company's board of directors approved and authorized a quarterly cash dividend of <unk> 40 per share payable on March 26, 2025 to stockholders of record as of the close of business on.
Speaker Change: March 12 2025.
Speaker Change: We believe that seamless enhanced liquidity position and prudent leverage philosophy has set us up to continue to be opportunistic drive external growth and create shareholder value into 2025 and beyond.
Michael: I will now turn the call back over to Michael.
Michael: Thank you Kay.
Michael: And thank you again to everyone, who took the time to listen to today's call. We appreciate your support and confidence in our ability to continue to drive value for you as shareholders and CLO Realty Trust that concludes our prepared remarks, operator, please begin Q&A.
Speaker Change: Thank you and ladies and gentlemen, and they will now begin the question and answer session to ask a question you May press historical is by the number one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing any keys do enjoy your question. Please press star two.
Speaker Change: Your first question comes from the line of Nate <unk> with BNP Paribas. Please go ahead.
Nate: Hey, good morning.
Speaker Change: I don't think you guys give a formal 2025 guide so it.
Nate: It might be helpful for you to kind of just walk through the guidepost.
Nate: Guideposts, I guess of what we're thinking about for this year.
Nate: Sure.
Nate: Nice to hear from you Nate Thank you for joining the call today.
Speaker Change: As you know and we've spoken to you in the past and in.
Speaker Change: In others, we don't have a very complicated business, it's a simple business, which we think allows investors and analysts such as yourself to fairly easily model our earnings.
Speaker Change: And we've designed our business to be simple to understand.
Speaker Change: Which we think is favorable to new and existing investors from a 2025 outlook perspective.
Speaker Change: We've generally said is an indication we are targeting a targeted to grow the enterprise roughly between seven five and 15% per annum.
Speaker Change: So our enterprise value today is roughly speaking $1 $92 billion. So that gives you a sense of external growth.
Speaker Change: That we would.
Speaker Change: Seek to achieve I think if all things line up from a market perspective.
Speaker Change: <unk>.
Speaker Change: Yes.
Speaker Change: I was told you.
Speaker Change: In the middle of last year as the.
Speaker Change: The market expected more feet.
Speaker Change: Ed.
Speaker Change: Reductions both through the middle at the end of last year.
Speaker Change: Yes, I think the market became very bullish and as.
Speaker Change: Is it related to possible transaction activity some of that has quite a little bit as you can probably imagine.
Speaker Change: With the latest outlook.
Speaker Change: Given by the fed as well as by some of the economic reads of inflation from a transactional activity standpoint.
Speaker Change: We're going to be very disciplined.
Speaker Change: So I gave you some indications of how we'd like to grow the business.
Speaker Change: But we're going to stick to our knitting to be disciplined and target.
Speaker Change: Those assets that we think.
Speaker Change: Are accretive to us the portfolio to earnings of course, and again to reiterate we are focused on long term net lease investments.
Speaker Change: In the right locations with the right tenancy sponsorship.
Speaker Change: So I hope that gives you some sense of what we're trying to achieve in 2020.
Speaker Change: Yes, I think it's helpful. Maybe.
Speaker Change: Maybe just like you haven't seen these kind of loans type thing.
Speaker Change: What what are you kind of expect the mix to be this year I guess between loans and just straight acquisition.
Speaker Change: How should we think about what the blended rate could even be because there's a pretty wide gap I think between the two so.
Speaker Change: Any comment.
Speaker Change: Okay.
Speaker Change: Yes, and I think Thats correct just from a loan perspective as you can tell by the most recent.
Speaker Change: Transaction that we did we were able to achieve kind of on those mezzanine loans mid teens returns during the I'll call. It funded period.
Speaker Change: And then of course, those transactions have an option to purchase each of those two buildings.
Speaker Change: As it relates to but loans of course begin and end right.
Speaker Change: Real estate ownership.
Speaker Change: Continue in perpetuity from a volume perspective.
Speaker Change: We are seeing more opportunities and Chris can speak to this more.
Speaker Change: With the opportunity to fill some gaps in development budget for.
<unk> transactions.
Speaker Change: But the vast majority of transaction volume that I think that we will do in 2025 will be acquisition fee ownership.
Speaker Change: Chris maybe you can speak a little bit and give a flavor as well for some of the transactions, we're seeing Nate would that be helpful to you as well.
Speaker Change: Yes, yes.
Speaker Change: Yes, great Thanks, Michael and David Good to speak with you again.
Speaker Change: Think as Michael alluded to the transaction market. When you kind of look at bond market type transactions did slow a bit going into the end of the year.
Speaker Change: What I will say is coming into the beginning of this year, our conversations for what I would call an characterized more relationship off market deals has picked up materially.
Speaker Change: And again, we're going to be prudent and we will not grow for growth's sake, but we do have a number of opportunities that we're evaluating.
Speaker Change: We do think that these opportunities come to us for a couple of reasons one.
Speaker Change: Our strong capital position.
Speaker Change: Two our relationships that we have out there across the various different property types and owners.
Speaker Change: Operators developers et cetera, and three our track record to close and so I think when you kind of think about that as a whole it does present some opportunities.
Speaker Change: As it relates to.
Speaker Change: Different types of deals I agree with Michael It is overwhelmingly weighted towards acquisitions. It is still a mix of medical outpatient facilities as well as inpatient rehab and surgical centers.
Speaker Change: And we're seeing different opportunities, whether that's smaller portfolios, whether that's other one off.
Speaker Change: Acquisitions in the markets that we're targeting.
Speaker Change: What we're focused on is lease term as well as the underlying credit of the.
Speaker Change: The sponsor guarantor or ultimate kind of it.
Speaker Change: I do think we are on track.
Speaker Change: Round acquisitions.
Speaker Change: Acquisitions for the numbers that Mike will walk through on a full year basis, we do have a near very near term pipeline that we are executing and that we hope to be able to speak more about in the not too distant future.
Speaker Change: Okay.
Speaker Change: Maybe just one.
Speaker Change: Obviously, the credit metrics improved in the quarter.
Speaker Change: Is there anything we should be aware of that new that could be a credit issue. This year or are there any known move outs.
Speaker Change: Attendance I told you about.
Speaker Change: So anything on that.
Speaker Change: Let me take that kind of in two parts, let me speak about actually in 2024 from.
Speaker Change: Releasing perspective of existing space, we had actually only one very small tenant leave us So we had a.
Speaker Change: Very high 90% renewal rate for our tenancy.
Speaker Change: We were already working not just on 2025.
Speaker Change: Hospital explorations, but also 2026, so as you can see by our results that we.
Speaker Change: That we displayed for the fourth quarter, particularly with the post acute medical transaction as well as actually some others that we're working on now we are very proactive about managing the existing portfolio too.
Speaker Change: Push out lease explorations.
Speaker Change: We think theres a lot of benefit to our stockholders and of course create durable predictable income stream.
Speaker Change: As it relates to we do think we've had an improvement in credit metrics I think it's reflective of the health care industry.
Speaker Change: Doing better.
Speaker Change: Each and every quarter and frankly every year.
Speaker Change: Since.
Speaker Change: Coming out of Covid, and particularly really over the last I would say 24 months.
Speaker Change: Managing labor issues managing supply issues.
Speaker Change: For their businesses and I think Thats really what you see.
Speaker Change: Because as mentioned, which you would you note we.
Speaker Change: We only have three tenants and two properties under one times coverage not just mentioned of those three tenants one of those tenants is a very high investment grade rated tenant.
Speaker Change: Kevin and I will also mentioned to you that all three of those tenants are current on rent.
Speaker Change: So we feel very good about the portfolio in terms of sort of.
Speaker Change: Where our focus is.
Speaker Change: You are asking I think really about watch list and we've often said hey, everything in our portfolio is on our watch list because we're watching all the time.
Speaker Change: We're very focused on I would tell you selling the scope and asset.
Speaker Change: <unk>.
Speaker Change: Admittedly a drag.
Speaker Change: And we've hired a nationally recognized broker and they are deep into the process sale process.
Speaker Change: And we're pleased with the feedback that we're getting I think.
Speaker Change: Pushed the team hears from me every day I would like it's sold last week.
Speaker Change: Or at least last week.
Speaker Change: That's a big focus of ours I think.
Speaker Change: We've actually had probably a reduction to a certain degree.
Speaker Change: Hi monitoring as we've gotten of course through students resolved in the sense that we own the only asset.
Speaker Change: And it's obviously vacant at this time, we've gotten through Genesis care as we had mentioned.
Speaker Change: So I would tell you from a high monitoring perspective.
Speaker Change: We've had things kind of improve.
Speaker Change: What I think is dramatically.
Speaker Change: Okay I'll leave it there thank you.
Speaker Change: Great. Thank you for joining Nate I appreciate it.
Speaker Change: Thank you. Our next question comes from the line of Rob Stevenson with Janney. Please go ahead.
Rob Stevenson: Good morning, Michael what drove the post acute extension timing.
Speaker Change: Aleve there were still.
Speaker Change: Term left on the prior lease was this just renewing early.
Or was it something else sort of driving the timing in the fourth quarter here.
Rob Stevenson: Rob Thank you for joining today and it's great to hear your voice.
Speaker Change: What really drove it I think was our productivity post acute medical is our largest tenant we have a very close relationship with them at.
Rob Stevenson: All levels.
Speaker Change: I've known Tony Miss a ton of the CEO for a very long time.
Speaker Change: And of course, they're being our largest tenant it was 15 separate leases.
Speaker Change: Debt.
Speaker Change: <unk> to each property and benefit from parent care at parent company guarantees.
Speaker Change: And there was a lot of term I'll say roughly speaking remaining term was 10 plus years.
Speaker Change: Very slightly in each case, but it was over 10 years and there was just an opportunity where I think as they grow their business.
Speaker Change: They would also like more certainty.
Speaker Change: We of course appreciate that certainty and think it benefits our business and so extended out so quite frankly it came about I would tell you more out of a phone call by asking them, saying would you be interested in and then saying we'd be interested.
Speaker Change: Okay and are these still independent leases or do they get aggregated into a master lease given the timing of the renewal.
Speaker Change: They're all individual leases and however, there are also all guaranteed by essentially the parent post acute medical we get reporting on each and every property on a very frequent basis of course, we get reporting and audited financials on the parent company as well so I would tell you.
Speaker Change: That I think the master lease by the way concept benefited us well through the Genesis care bankruptcy.
Speaker Change: But.
Speaker Change: Those are in some ways, an optimal but I don't think we are hindered in any way structurally in this transaction as a result of being structured the way it is okay.
Speaker Change: And then Michael I guess as we're thinking about G&A in 2025 got it Chris to the team in 'twenty four how are you and the board thinking about any additions of note that you might want to make over the next 18 months personnel wise are you, where you need to be or there is still.
Speaker Change: More senior positions that you anticipate adding to the firm over the next year or two how should we be thinking about that.
Speaker Change: I'm going to answer the broader question I'll actually K speak a little bit to give you a picture of.
Speaker Change: Sort of.
Speaker Change: Our run rate G&A as.
Speaker Change: As we had some some one time events last year, which you can speak to.
Speaker Change: Overall, we don't expect any ads.
Speaker Change: The C suite level, if you will meaning we're we're staffed up.
Speaker Change: Throughout the organization at the mid and low levels. We're also staffed.
Speaker Change: In.
Speaker Change: Structured to be scaled from a G&A perspective, we believe we can grow from the current $2 billion to $3 billion with very incremental adds at the lower level. So these would be folks like.
Speaker Change: When we add one property, adding a property manager or a property count, but rather adding a number of properties, adding say single property manager a property accountant and again those are.
Speaker Change: Lower level people, so not not too impactful to the.
Speaker Change: Two the overall G&A perspective.
Speaker Change: Okay, maybe you can speak in.
Speaker Change: Answer more directly Rob as well as it relates to.
Speaker Change: On a go forward basis.
Speaker Change: Sure. Thank you Michael Rob as we look at our G&A year over year, and if we remove severance it's fairly consistent.
Speaker Change: Amount hovering a little over $22 million and so I would say a reasonable run rate is somewhere in that.
Speaker Change: <unk> 22, and a half to 23 and a half.
Speaker Change: Range, just given some increase as expected including.
Speaker Change: Increases were currently.
Speaker Change: Experiencing and will continue to experience as a large accelerated filer just on the various regulatory front.
Speaker Change: As it relates to audit costs and things of that nature.
Speaker Change: Okay, and then while I have you.
Speaker Change: Anything in the fourth quarter <unk> numbers that were nonrecurring and arent indicative of a good run rate going forward either positively or negatively.
Speaker Change: In the fourth quarter <unk> numbers, we did not have any material sovereign.
Speaker Change:
We did not have.
Speaker Change: Any lease termination payment.
Speaker Change: Or other onetime items that are large that Keith and Charles Smith.
Speaker Change: Okay, and then with the starting facility are you still thinking that the most likely result, there is a non health care use and if you do release it what type of facility is that likely to be do you think at this point.
Speaker Change: The facility.
Speaker Change: Due to this really its location has a fair amount of flexibility. So of course it was.
Speaker Change: Previously our healthcare facility lease by steward.
Speaker Change: We've had a lot of interest on the residential front because of the location because of the large parcel of property.
Speaker Change: That it.
Speaker Change: It's situated on there is an existing building there could be converted to residential could remain a health care facility.
Speaker Change: In terms of being partial to sale or lease I think were impartial.
Speaker Change: I think we are seeking really the maximum outcome for the company.
Speaker Change: Whether it's proceeds or whether it's a.
Speaker Change: Tenant leasing situation, if it's a tenant leasing situation.
We think the building would need some capital.
Speaker Change: Which of course, we could in are in a position to provide.
Speaker Change: But I would tell you agnostic as it relates to sale or lease.
Speaker Change: Okay, and then last one for me, Chris where are you seeing the best acquisition opportunities. These days among those sort of medical outpatient the rehabs in the surgical specialty assets, what's sort of looking most attractive to you at this point, given where rates are et cetera.
Speaker Change: Yes, that's a great question and it really I would say its between what we're seeing around inpatient rehab again across various different operators as well.
Speaker Change: It's well as.
Speaker Change: Outpatient medical.
Speaker Change: Certainly youre seeing opportunities, both kind of on or near campus.
Speaker Change: Really fit our criteria and what we're always going to be cognizant of is really just the pricing of it and again, we're focused in on term as well as the underlying credit of that but that tenant and so yes as I mentioned in my earlier comments. The conversations have certainly picked up kind of coming into the new year after a bit of a slower.
Speaker Change: Kind of late Q4, and we do think that there are opportunities out there and both of those different property types. We're also seeing.
Potential opportunities around micro hospitals as well as.
Speaker Change: Think about urgent cares or emergency departments or hybrid thereof.
Speaker Change: Okay. That's helpful. Thanks.
Michael Lewis: And your next question comes from the line of Michael Lewis <unk> Securities. Please go ahead.
Speaker Change: Thank you.
Michael Lewis: Could you talk about the timing of the two mezz loan investments as they get turned down and maybe the cadence of.
Michael Lewis: Recording investment income does that start to ramp up in 'twenty five.
Michael Lewis: Hi, Michael Thank you for joining today, it's great to hear from you.
Michael Lewis: As it relates to the.
Michael Lewis: <unk> loans, we anticipate.
Michael Lewis: Beginning to fund in Q1 and to be both fully funded.
Michael Lewis: By the end of Q2.
Michael Lewis: 2025, we will start recording.
Michael Lewis: Interest income.
Michael Lewis: Those loans of course, as we fund the dollars.
Michael Lewis: So.
Michael Lewis: From an earnings perspective, we will see that Q1 and Q2.
Michael Lewis: Those will get funded and then of course thereafter as we have previously mentioned there is a senior loan. So these loans will be will remain outstanding.
Michael Lewis: Until such time, they are repaid either through our purchase or otherwise some some other sale or refinance.
Michael Lewis: Okay, perfect and then construction by the way.
Michael: I will just add Michael construction, because I think is irrelevant point can make construction is expected to be completed really in about the first half of next year, which is 2026.
Michael Lewis: So as you think about how long.
Michael Lewis: The shortest period arguably we could have these right. It would be of course that period of time, and then presumably perhaps sometime thereafter outstanding earning net interest.
Speaker Change: Okay perfect. Thank you.
Speaker Change: You noted the fewer operators below.
Speaker Change: One time, EBITDA and coverage and the overall coverage is up.
Speaker Change: But there was a bigger increase in those between one time to two times I was just wondering if there's anything notable.
Speaker Change: Deteriorating a little bit on the coverage side or if it's really just a function of maybe you have some operators dancing around that time.
Speaker Change: Artificial threshold.
Speaker Change: Sometimes they're in and sometimes they are above.
Speaker Change: So you hit the nail on the head as it relates to some operators dancing right around the two times coverage.
Speaker Change: We've got.
Speaker Change: Percentage in there that's right at about 195, and two times, So 199 times right in that.
And that percentage I'll also note as folks moved out of the below one times they went up to between one and two times.
Speaker Change: Yes.
Speaker Change: Between one and two times increased.
Speaker Change: First of all as a result of folks moving out of the below one times.
Speaker Change: And then some folks dancing around the two times and also mentioned to you a little bit of it has to do with.
Speaker Change: When we receive financials in the financials that were getting the financials are evaluated on a trailing 12 basis.
Speaker Change: And arguably that should takeaway some of the cyclicality as it relates to.
Speaker Change: Healthcare however.
Speaker Change: As we know for instance.
Speaker Change: Flu seasons, and cold season exists in the fall and the winter months in the fall and in the very early spring of each year and so the 'twenty three 'twenty four flu season.
Speaker Change: And admissions were lower than for instance, in the 'twenty four 'twenty five, but we're using $6 32 for financials those wouldn't be reflected in the same way. If we were using 12 31 2020 for financials. So it's a little bit of that as well. So I think theres a science to reading these charts, but there's also a little bit of art.
Speaker Change: And so youll see it move around a little bit in that in that manner.
Speaker Change: Okay, Great and then I'm going to go all the way back to the first question you were at which is there is no 2025 guidance, but maybe you could tell me. If this is kind of a fair way to think about it right. So you already.
Speaker Change: <unk> talked about growing the portfolio of seven 5%.
Speaker Change: More acquisition and loans funded with a line of credit you don't have debt maturities. The term loan is hedged with the new rate is.
Speaker Change: Very low lease expirations, hopefully no credit issues.
Speaker Change: We talked about the <unk>.
Speaker Change: As long as getting funded did I kind of cover the highlight.
Speaker Change: The building blocks as we think about 'twenty or did I Miss anything.
Speaker Change: I think you did I think one area of quote unquote, I'll say upside as it relates to operations as the sale or lease of stone.
Speaker Change: And.
Speaker Change: Rob previously asked about.
Speaker Change: Stoughton would we rather sell or lease I mean, a sale transaction immediately obviously.
Speaker Change: Takes that off the books, if there were some lease scenario there can be of course, a scenario where.
Speaker Change: There could be a ramp up period that capital funding so.
Speaker Change: No.
Speaker Change: I would tell you we're indifferent as to the outcome because we want to maximize for our stockholders a sale clearly cuts off at that aspect.
Speaker Change: That transaction and the carry cost associated which which are.
Speaker Change: Meaningful and I think we've talked about that before so I think thats an upside aspect. If you will to our operations and the other thing I would mention two other.
Speaker Change: Things to consider one is from a cap rate perspective generally in the market you have asked US. This question, what we're seeing and as you know we're focused on everything from the MLP space to the inpatient rehab till the specialty hospital space.
Speaker Change: And.
Speaker Change: From a cap rate range perspective at the lower end of course MLP at the middle and upper range, we're going to have those other asset types, and what Bob and weave and seek out the best risk adjusted returns, but that cap rate ranges between six five and seven five.
Speaker Change: Overall, and I think we've talked about that range.
Speaker Change: More recently it can move around a little bit, but my own view is that.
We're talking about higher interest rates for longer my personal view is we have a new normal.
Speaker Change: That new normal has set in.
And in our prepared remarks, and I wanted to just bring your attention to it we indicated a target leverage level of four five to five five times.
Speaker Change: Which is generally consistent with our prior indications.
Speaker Change: We stated.
Speaker Change: As you all know that we're a moderate leverage borrower relative to our peers.
Speaker Change: It does appear the interest rate environment has reached this new normal I just mentioned.
Speaker Change: Slightly higher than what the market of course expected a year ago as you well know expectations changed particularly in the middle to.
Speaker Change: To the end of last year and certainly the beginning of this year due to the anticipated inflation rate, presumably being higher than the.
Speaker Change: 2% target rate.
Speaker Change: So I don't think the market is expecting as many interest rate decreases as they anticipated.
Speaker Change: Let's say for example in May or June of last year.
Speaker Change: So as we think about stabilization of cap rates again.
Speaker Change: Don't expect big expansion or contraction for what we're targeting utilizing.
Speaker Change: Utilizing moderate leverage.
Speaker Change: Really sort of giving you more specificity around a view towards when we would raise equity to delever the balance sheet and Thats really at the end of the five five times level.
Speaker Change: <unk>.
Speaker Change: So hopefully that's helpful as well as it relates to your modeling.
Speaker Change: It is thank you that's all for me.
Speaker Change: Right.
Speaker Change: Thank you and there are no further questions at this time I would like to turn it back to Michael <unk> for closing remarks.
Speaker Change: Thank you operator, we continue to be grateful for all of your interest in CLO, We hope to see some of you tomorrow during the Wolf Real estate conference and in March at the Citi Conference have a wonderful rest of the day.
Speaker Change: Thank you ladies and gentlemen. This concludes today's conference call. Thank you all for joining you may now disconnect.
Speaker Change: [noise].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.