Q2 2019 Earnings Call
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Management on the call. This morning include Bill Wagner, Chief Financial Officer, Dave Sedgwick, Chief Operating Officer, Mark Lamb, Chief Investment Officer, and Erin Willis director of asset management.
I will now turn the call over to Greg Stapley, Caretrust, REIT, Chairman and CEO .
Thanks, Lauren and welcome everybody good morning.
Because you already know it was a it was a big quarter for US here at share Trust on the acquisition front on April 1st we closed on a $215 million 12 facility acquisition.
I'm pleased to report that to date those assets are doing every bit as well as weak.
Originally projected and they're continuing to improve.
After that we essentially match funded that investment with a well received overnight that netted nearly 150 million in new equity for us.
We continued to see solid deal flow as we head towards what could be a record growth here for our portfolio.
Our leverage is near an all time low and we remain well positioned to selectively take advantage of opportunities large and small as they arise.
But those acquisitions and others, we crossed the $300 million market acquisitions very early this year.
Three hundreds always been an internal any target for us historically taken a whole year to reach but that has never been the overarching objective that's never been the goal.
Certainly never been the only goals.
Our goal for 2019 is much the same as it has always been to enter the next year. In this case 2020, as a bigger stronger leaner and more sophist organization than we've ever been.
Knocking out so much of our external growth targets. So early in the year has afforded us the opportunity to more closely look inward now which is something that all organizations must constantly do to survive thrive and keep moving to the next level.
For us this entails critically reexamining, each individual asset and operator relationship in our portfolio as well as every function that department in the organization.
We're still in that process. In fact, we would argue that we should never not be in that process to some degree.
And we've identified through that process. Some positive changes that we think we can make.
For example, like all reads, we have a few less do but these are individual assets in the portfolio that weve unavoidably picked up in larger transactions. We believe we can now consider trimming some of those assets from the asset base.
In our operator pool, we have a relationship or two where the operator situation priorities overall business have changed and maybe they don't necessarily aligned with our priorities the way we would like them to.
And here at home.
Our relatively small but still eager team still has the long term goals that are unmet and capabilities that need to be expanded.
And so in a year when others might have rested on their laurels after such a fast start, we're busier and making more ways than ever.
Some of this is not easy, but we do it because we believe this rig will make us a stronger leaner and more capable caretrust now and for the future.
So with that I'd like to turn sometime over to Dave to talk about our current assets in operators into talking about one of the upcoming changes that we're making.
Mark will discuss recent acquisitions in the pipeline and Bill will wrap up with the financials and guidance Dave.
Thanks, Greg and good morning.
Since our last call I discussed, how we're continually reevaluating the portfolio and our operator pool.
This practice has been helpful in asking some hard questions about where operators and assets are and where they might be headed.
In that light, let me talk about Trillium in Ohio.
In December 2017 trillion moved quickly to replace pristine in the more challenging part of our Ohio portfolio.
Which included seven assets in the Cincinnati area.
Ohio was a new state for them and they have struggled to gain traction there.
We've reported for several quarters that we've been staying close to them as they work through.
What they need to to return those buildings to prior performance levels.
Well, we've been clear that we never felt that they were out of the woods yet.
In recent weeks, we in Trillium that come to the conclusion that change is best for them and for these facilities.
Replacing Trillium allows us to accomplish three objectives.
One to prune a couple of the most challenging facilities that would otherwise require a lot of heavy lifting to return them to prior performance.
Two.
To bring in an operator for the remaining assets with more experience and resources in the region.
And three to allow trillium to refocus their efforts in Iowa, where we expect to retain them in 10 facilities.
As we reported in our Q and press release yesterday, we're in the process of selling three of the facilities and re tenanting the remaining four.
As we sit here today, we expect those transfers to occur on September onest.
Subject to normal diligence and state approval processes.
After the dust settles on the repositioning of these seven assets the new Trillium lease will represent approximately 2.2% of our revenue.
Shifting gears to our seniors housing portfolio overall coverage declined from 1.3 times in Q1 to 1.22 times this quarter.
This appears to be fairly consistent with what we think were seen across the industry on a trailing 12 basis.
However, during the quarter, we began to see some real improvements in several of our assisted living assets for example.
Our largest seniors housing operator outside of insight as premier.
Last quarter, we previewed for you some of the initiatives and personal changes underway at that tenant.
Those initiatives have begun to produce some solid occupancy increases in a number of our premier facilities in the second quarter and sense.
There are only 20 assets included in our non insane seniors housing lease coverage number as reported in our supplement.
And the premier assets represent eight of them were about 47% of that revenue.
So it's worth keeping in mind that 20 assets is a relatively small group.
In a swing in the performance of the couple of facilities can make for a fairly volatile coverage graph quarter to quarter.
That said, we're seeing positive trends not only in premier but also in other areas of the seniors housing portfolio.
And we expect to see overall coverage climb modestly over the next couple of quarters.
Internally in recent months, we've strengthened our asset management and underwriting processes with third party data sources as we become more adept with them. We're impressed with the way. These sources are helping us benchmark, our current and prospective operators as well as target acquisitions against the competition in their markets and states.
We've also recently hired another outstanding former operator to supplement Eric and our asset management team.
Looking at the broader industry, there hasn't been any material change to the Plainfield since last quarter for operators.
Labor costs are still challenging.
Highlighting how being a best in class employer and health care provider go hand in hand.
The 2.4% Medicare rate increase coming in October is certainly positive for our skilled nursing operators and we and our tenants Likewise remain optimistic about the opportunities from the switch from rugs four to Pdps.
And with that I'll hand, it over to Mark to talk about the pipeline Mark. Thanks, David Hello, everyone. In Q2, we closed approximately 241 million and new investments. This included the 215 million dollar acquisition of the 12 building portfolio in Texas, and Louisiana that we closed on April Onest. It also included our May Onest acquisition of 118 bed skilled nursing facility located in the Dallas Fort worth MSA with Nexgen P for 10 million.
Lastly in June we triggered our purchase option on Cascadia of Napa brand New state of the art 99 bed skilled nursing facility located nampa, Idaho for 16.1 million.
Our year to date total investment amount is $305.2 million and we expect to add to that over the coming months.
Among other things, we anticipate that our preferred equity investment in Cascade of Boise, a second brand new state of the art 99 bed skilled nursing facility located in Boise, Idaho.
That is now nearing stabilization will close by year end.
At a similar price to the price we paid for it SR facility in nearby Napa.
The acquisition market continues to be made up of mom and pop sellers of one off facilities to small and midsize portfolios of non strategic facilities.
Ranging from non stable unbroken to breakeven in more stabilized.
Pricing for sniffs continue to be aggressive in states, such as California in Maryland in Virginia, While states like Texas continue to see fallout.
The failed bed tax proposal from this past legislative session with several buildings on the market and more on the way.
We continue to underwrite and evaluate many deals impair them with our operators and their specific markets as well as markets in which they'd like to grow.
We've seen some lumpiness in our deal flow over the past quarter, which is normal.
And we would expect investment opportunities to pick up as we head into the fall and next months in their conference turning of the pipeline as we sit here today. The pipeline is in our normal 100 to 125 million dollar range.
Consist mostly of singles and doubles and a couple of small portfolios.
And includes tack ons for our existing operators as well as deals we compare with our new operators.
Please remember that when we quote our pipe we only quote deals that we are actively pursuing which meet the yield coverage and underwriting standards. We have in place from time to time.
And then only if we have a reasonable level of confidence that we can lock them up and close it and now I'll turn it over to build to discuss the financials.
Thanks, Mark for the quarter. We are pleased to report that normalized FFO grew by 35% over the prior year quarter to $33.1 million.
Normalized essay de grew by 34% to 34.3 million.
Normalized FFO per share grew by 9.4% to 35 cents.
Normalized fad per share grew by 9.1% to 36 cents.
Given our most recent dividend of 22 and a half cents per share. This equates to a payout ratio of 64% on AFFO and 63% on FHLB, which again represents one of the best covered dividends in the healthcare sector.
Our leverage and liquidity positions continue to remain strong in the quarter, we closed our largest investment today and sold via an overnight offering 6.6 million shares at $23.35 per share, resulting in net proceeds of 149 million.
We did not sell any shares under our 300 million.
Dollar ATM that we put up in Q1.
And our and our revolver balance currently sits at 55 million.
For guidance in yesterday's press release, we maintained our 2019 annual normalized FFO per share guidance of $1.35 to $1.37.
And our 2019 annual normalized epay de per share of $1.40 to $1.42.
This guidance includes all investments made in announced to date, including the expected close in Q4 of our remaining preferred equity investment as Mark mentioned, the Trillium restructure as previously discussed by Dave a diluted weighted average share count of 93.4 million shares and also relies on the following assumptions.
One no additional investments or dispositions, nor any further debt or equity issuances this year.
To inflation based rent escalations.
Which account for almost all of our escalators at an annual at an average rate of 1.5%.
Our total rental revenues for the year again, including only acquisitions made today.
Our projected at approximately 166 million, which includes approximately 2 million of straight line rent.
Not included in this amount our tenant reimbursements or write offs of accounts from straight line rent receivables, which we previously accounted for on their own line items in the income statement due to the new leasing standard. These are now grouped with rental revenues.
Three.
For interest income of approximately $4.2 million.
Five interest expense of approximately 28.5 million.
In our calculations, we have assumed a LIBOR rate of 2.25%.
That plus the newly reduced grid based LIBOR margin rates of 125, Bips on the revolver and 150 Bips on the seven year term loan make up the floating rates on our revolver and terminal.
Interest expense also includes roughly 2 million of amortization of deferred financing fees.
And six were projecting gionee of approximately $13.9 million to $15.1 million. Our DNA projections also include roughly $4.1 million of amortization of stock comp.
As for our credit stats calculated on a run rate basis as of today, our net debt to EBITDA is approximately 3.4 times leverage is about 20% of enterprise value and our fixed charge coverage ratio is approximately six times. We also have 10 million of cash on hand.
And with that I'll turn it back to Greg.
Thanks Bill.
In in Dave's remarks, he mentioned that.
Eric's asset management team Crone with the addition of a new operator, we're excited about that I'd be remiss, if I didn't mention Caretrust family has grown with the addition of a new Lam.
Mark and Aaron had a new baby over the weekend and he is little bleary eyed today, but.
We congratulate them.
We hope this discussion has been helpful. We thank you for your continued support and we thought that we'd be happy to answer your questions.
Operator.
Ladies and gentlemen, if youd like to ask a question. Please press Star then one.
If your question has been answered and you'd like to remove yourself from the queue May press the pound key.
Once again to ask a question that's star then one.
Our first question comes from Jordan Sadler of Keybanc capital. Your line is open.
Thank you and good morning.
Good morning.
I just wanted to start with Trillium, if I could.
Bill maybe can you walk us through what's embedded in guidance for the.
Reduction from Trillium, I guess from an FFO versus AFFO perspective.
Yes, I can do that.
We.
Have.
For the remaining.
Rest of the year, we have.
Trillium in there.
At around 300000 per month.
We have a new tenant coming in.
That.
Around 2.2 million on an annualized basis.
And we also have interest income.
Or we're providing seller financing.
On the assets that we're selling and we have about 2.8 million in there on an annualized basis for that so you just have to.
Put it in for those periods that they are outstanding within 2019 for to arrive at your guidance number.
So on the latter two things so on the new tenant and the 2.8 million of interest income those are starting nine one.
Correct them first okay and those are cash are those all cash numbers you just threw out me 300, a month to 2.2 and 2.8.
Yes, they are all cash.
Is there a difference.
Versus gap.
I imagine things got escalators right.
Trillium had escalators in there that pricing.
There is a slight increase in the straight line rent straight line rent from last quarter to this quarter of about 100000.
Okay.
Spread out over a period July through December I think I'm going after a follow up with you that for that just because.
Trillium.
Was paying $12 million a gap rent into Q.
You know or a million in change a month versus now.
Something that looks like 300, a month plastic.
The straight line rent, so that's probably a big Delta I'll follow up with you after.
I want to give a quick explanation there but.
Separately.
You talked about.
Greg in your process here looking forward.
That it's incumbent upon you to basically asset manager portfolio and to look within Opportunistically and fix what's going on.
Before it.
Finally, before as an issue so one I'm kind of curious.
What the catalyst was.
For Trillium in Ohio.
That was destroyed the broke broke the camel's back so to speak and then.
It was was there are there any others.
Tenant wise or assets that you identified that you could sort of point to.
Oh sure Youve managed out or managed somehow.
Sure.
I'm not sure I'd point to any particular straw that broke camels back. It was just after 19 months. It was really just time to have serious conversation about how they were doing it has been a couple of quarters that we've been saying look we're not out of the woods or not on the words.
And.
And so it just became time to have that.
Hard conversation.
As we mentioned that.
Piece of the Ohio portfolio included the most challenging assets.
In in we really felt like.
There was a different tack that we wanted to take there.
With them.
So.
You know took some discussion but but.
Very quickly.
They.
Realized that that was probably right.
And and so we've been working cooperatively since since the middle July to come to a resolution that.
Results in the best outcome for both them and for US and most importantly for for patients and residents in those facilities in it for the preservation of value.
In those facilities, we could have waited longer we could have let this let this go and kind of cross your fingers and hope things would get better we could have continued to work with them as we do with all of our tenants.
To provide input and insight on what we thought it could happen, but honestly it was just.
There were just much better options.
D. and we.
Read on that.
For those assets.
And then investment going forward.
With respect to the rest of our operator pool I got to tell you, we really love our operators.
Almost all of them are very open and transparent with us we have really good back and forth dialogue.
You're welcome.
The portfolio management efforts that we're making and the and the operator background and insight that we can provide.
As a rule.
That said, sometimes things just change and there are.
Every once in a while you have an operator, who who just decided they don't want to grow.
We had that happened with an operator that we have in the portfolio I think the first deal we ever did was.
With that operator about out of Idaho, who ultimately decided that his life was going to take a different direction and so we sold those back to him at a small profit and Ann Arbor way. It just wasn't worth maintaining a relationship that small.
We have other operators who knows.
Situations change for one reason or another and you just got to constantly reevaluate that and look at it somebody who was a superstar two years ago may for no through no fault of their own or maybe through fall to zero.
It's not the best choice for portfolio looking forward today, and I think I think there is ample precedent for the idea that you should be.
Anybody with a business, we're portfolio or a group of businesses should be constantly.
Striving to be the very best in the business and sometimes that means you take the bottom.
Tier and you do something with it whether you fix it change it.
Lump it off or do something and I think as I as I said too I think we'd be remiss.
If we were not.
Proactively asset managing our portfolio owner, operator pool all of the time set is okay.
Yes, no that work.
And that's helpful. I guess, the one other sort of follow up on Trillium would be.
This is sort of.
You know pristine sorta rearing its head.
Again, and I think that post pristine the lessons learned were really you know the enhancement and the focus on the scorecard.
So I know Trillium was an existing operator for you guys that you kind of moved over into the pristine assets I'm, just curious what sort of if there's sort of a lesson learned.
You know post mortem here on either.
Some portion of the assets here in Cincinnati.
Or on you know for the scorecard vis-a-vis Trillium.
Yes, well I appreciate you, bringing up the fact that these assets were assets that we transition from Christine If you remember where we were back in the fall of 2017.
We're working very hard again to preserve value and.
Very large portfolio that at the time represented like 60%, 70% of our revenue.
And to be able to move the refer half a bit off.
Into the hands of an operator that we knew and liked interested in trillium was.
And to do it in fairly short order, we moved that on December Onest of 17.
Was a real win for us.
Especially when you consider the very minimal amount of rent leakage that we experienced in that transaction.
So says.
But as Dave pointed out in his prepared remarks.
The Trillium was new to Ohio at the time, they were having import resources they were having to do other things, they're having to learn new systems.
And as they went through that process. They were doing okay. Initially and then they lost a couple of key personnel, who they've invested in heavily in that state and.
And that was back at the beginning of this year and since then it's just been a really tough slog for them and so in plus at the same time, you may recall, because I know you cover other other landlords.
They were engaged in some fairly substantive conversations one of their other landlords.
Over some assets in another state.
That needed to be close to that.
We believe they've told US has taken a very substantial tool on their time their attentions and their cash flows and so.
It really got to mid July and it was just it was just time to really have that hard conversation.
With them, we don't we don't dislike Trillium, we we.
We update our scorecard regularly and certainly things for them have changed a bit on on the way. They look on that score card, but it's still good enough for us that we want to keep them in Iowa in the Georgia asset.
And continue our relationship with them.
In terms of other things that we've learned I guess I guess the bottom line is.
If you've got the the timing opportunity, which I don't believe we really had back in 2017.
You would place a very high premium on the importance of local knowledge experience and relationships.
When you were looking for the right fit between an asset or group of assets and then operator.
And I think you would also.
Be very careful to have a plan b C and D in Everett.
In terms of in terms of operators every place where you have assets.
That that could change over an worth situation could change overnight.
We are this is health care business and.
You don't want to.
Moment any kind of.
Worries about about headline risk with health care, but you all know it very well.
And.
You know that the changes and so it's really good to have options.
If and when.
Those changes pose challenges to the folks operating your through process.
Hey, I appreciate all the color. Thank you.
You bet.
Our next question comes from Chad Vanacore of Stifel. Your line is open.
Okay.
Hi, Jeff.
If your telephones muted please UN mute.
Yeah.
Let's sell it will come back to Chad.
Our next question comes from Jonathan Hughes of Raymond James Your line is open.
Hey, good afternoon.
Can you give us an update on the other former pristine assets in Ohio that are operated by trio and Hillstone that I think were admittedly the easier ones.
Yes, Hi, Jonathan this is Dave.
And are doing just fine with those trio.
Took the Dayton area portfolio.
Those were admittedly better performing assets compared to the Cincinnati seven.
Attended trio senior operational and clinical leadership has has personally invested countless hours into those operations and markets.
And those efforts.
Our starting to translate into some traction with key decision makers in those markets and key relationships with.
A major health system, there, which we which is some momentum that.
They were really happy to see.
That will boost that we believe will lead them to.
To really ramp up their census, and hitting their census projections.
Another another tailwind for trio is just the increase in the Medicaid rate that Ohio recently passed.
That's going to be a material benefit for their portfolio, especially if you couple that with the.
The increase in census that we expect in the second half of the year.
So they are making really good strides they've invested a ton in their people and their leadership.
In marketing.
And in in clinical results so.
Again, they like Weve like we said last quarter, they're also not.
In out of the woods, yet, but they do have some momentum that and traction that we.
Really never saw in Cincinnati.
Do you think they would be open to taking the four you plan to keep score.
Matt I assume they looked at it 18 looked at that 18 months ago or so.
Maybe didnt choose to take on that.
Curious if we can expect to maybe see an existing operator take some of those four or would it be a new relationship.
Yes so.
Trio has their hands full in the Dayton area and.
We actually Didnt show it to them because because we know.
That.
You know, we know where they're out with their plan in Dayton.
We are right now talking to a few different operators for the remaining four.
Including new and existing Caretrust relationships.
And.
So it's just unfortunately as we sit here right now, it's it's premature to say who that is going to be.
Okay.
And then I guess just sticking with you Dave you did talk about senior housing coverage earlier mentioned premier is going well, but.
I mean that implies the other I think 12 of those 20 properties site.
Pretty decent sequential dip I get at the small pools that can be volatile, but was there one or two property specific properties.
That caused that drag or was it pretty broad based in terms of the coverage drop there.
Yes, there were two or three properties.
That it really kind of took a step back from a census perspective.
And.
We're working closely with those guys and.
And watching and helping them get that back up.
So.
And maybe went on average were those 12 bought.
And when were they bought.
Yes.
Been previous pre 2018 right.
Yes.
Okay.
All right and then just one more from me for Mark.
First off congrats on the New addition, but.
Was hoping you could give us some more details on the pricing for deals in the pipeline shut its aggressive on the West Coast Northeast and then can you comment on the expected cadence of external growth.
Through year end.
Yes, I think.
As we look at our applied.
The number of the the transactions that were.
Narrowing it on our our off market so.
Despite.
Pricing.
Being aggressive in certain of these states we feel like were.
We're buying them right and pairing them with operators in specific markets that.
That had experience in those markets. So we expect.
Good things once once we close the transactions and operators have the ability to get in and execute their business plans. So.
As we sit here.
I think.
The question is how close do we get to 400 million this year.
I think we feel.
I think we feel pretty good about.
About a lot of our pipeline and yes. It from a pricing perspective, you know, it's a mix of assisted living and skilled nursing.
Definitely slanted towards skilled nursing pricings anywhere between.
I'd say 99, and a quarter on on start rates.
And then a couple that are.
Kind of in the mid nines. So it's really all over the board, it's really kind of state specific and.
And.
Competition specific.
In those specific states so.
Did that did that answer your question.
It does and then maybe just pricing on the small senior.
Portion of the pipeline that that's in there the pricing there.
Yes, I would say is.
It's it's kind of in the in the low to mid eights.
Yes.
Good West coast market.
Okay, John it's Greg on pricing I would just add it remains pretty aggressive in kind of is what it is.
But we continue to maintain pretty tight underwriting standards on what were willing to pay and what we'll put those leases out out.
Our our coverage requirements have actually declined and we've been willing to.
You can give up some yield to get better coverage and that's probably one of the reasons you see us doing less assisted living seasonality.
Dan skilled nursing because the delta between what we're willing to do on the coverage front.
On some of these.
Assisted living assets and what some of the market has been.
It is still fairly modest much it's much closer and more.
The gap that we can close on the SNF assets just wanted to add that.
Okay.
All right Thats it from me thanks for the time.
Thanks.
Our next question comes from John Kim of BMO capital markets. Your line is open.
Thanks, Good morning.
On Trillium.
No.
Back a couple years ago, when you transition of the assets to them. We're seeing is that the coverage the rent coverage of one to two which at the time being high.
But I was wondering if you had said it at one three or one fiber and just some number more conservative than that would you have still transition trillium outdoor would that change have been announced for bone.
Yeah, It's a great question, John and I and I wish the answer were that if we had set the coverage a little higher than that.
We wouldnt have done what we did but that's really not what's the motivation was here.
There were a lot of things going on for Trillium and.
It would not have made a difference if we'd added another 10 or 15 or even 20 bips to that to that coverage, we still believe that that portfolio.
He has a lot of potential a lot of upside.
And we like most of the assets pretty well.
But.
We.
We would still be doing.
What we're what we're doing right now.
By way of cooperating with Trillium too too.
Folk refocus them and I wouldn't take them out of Ohio.
Okay, and then looking back again.
The year after that pristine transition.
2018, with a very relatively slow acquisition volume year for you.
Doesn't sound like that's the case this time around and I'm wondering why you're confident that you will continue to grow externally is it because your bigger company today or in the balance sheet better or you just see more opportunities in the pipeline.
Yes, I, just think I think kind of the timing of the transactions that we've been working on as you.
No.
When we closed on the on the two big transactions earlier. This year. Those took took a lot of time, but while while we kind of hits certain periods in Q1 waiting for.
Going forward, the Big project Gulf Coast transaction to close we were reloading the pipe and working on.
Everything thats kind of hitting.
You know now and over the next quarter so.
So it's really just kind of a function of.
You know that really that the transactions and where they're coming in and and the timing of those.
Okay. My last question is on.
And finally, I think you've cited in the past that one of the successful characteristics of and sign them as an operator.
Is that they have a decentralized management structure.
And I'm wondering if you see that in your other operators. If you think thats important for some of your other partners and it's something that you.
Potentially recommend that they adopt.
Yes, we all want to answer that one.
[laughter] everybody's got an opinion on that.
It's a great question I'll, just start and then hey from anybody else jump in.
That really works well for enzyme and we havent come from there, obviously believe whole heartedly in that decentralized.
Highly internally accountable kind of.
Organizational structure.
Its work to super well for them.
I think it lends itself well to the personalities over there.
And one of the things we've learned as we've we've come out and started dealing on a very close basis with lots of other operators is that everybody personnel is a little different in some people.
While some people are are able to do that and good at that.
That is a very different skill set and not a lot are able to let go of control that said most of our operators are fairly small and.
There and so they're not really at that point, where where it becomes.
Necessary for them for in our in our view if we're applying the enzyme.
Model and mindset.
For them to start relinquishing more that control, but but we do think that that is a that is.
Great.
Great management, and operating philosophy, and we do we do preach it fairly regularly to our towards 10, it's Dave.
The only the only thing I'd add to that is there.
In speaking with our operators and as Weve at new operators. This.
The amount of.
Priority that they give to the administrator and local leaders is always a really important point for us.
And then there's different ways to skin that cat, but if we come across the company.
That we feel.
It does not value the local leader, even if they have even if they don't have a decentralized model like inside.
We're going to be really wary of of.
Doing business with them.
Because.
What what's what we are convinced of is that.
Talent at the local level.
Even.
Really discrete regional level.
Really matters a lot and so that's certainly part of our our conversation with her existing and prospective operators.
Thank you.
Welcome.
Our next question comes from Chad Vanacore of Stifel. Your line is open.
Chad if your telephone is muted please UN mute.
We'll we'll move on and pickup Chad later.
Our next question comes from Michael Carroll of RBC capital markets. Your line is open.
Yeah. Thanks, Gregg can you provide some color on the company is asset management plan I know you said the Trillium was one of those more difficult decisions that you had to make.
Do you anticipate making other decisions or is this just a.
The only issue that you are currently tracking.
Yes, Mike Let me. Thank you for the question I, Let me just clarify if I left the impression that it was a difficult decision I mean really by the time, we got to sitting down and really thinking hard about it it wasn't that difficult at all.
It was a difficult conversation.
But.
But the decision was fairly obvious.
At the time so.
And we think that that's that's really the way the way it ought to be.
If we look at these things and sort of step stuff out.
Whereas is going and whats the likely likely outcome.
The urgency to act early.
While you have time before before things really deteriorate is it should be just.
All consuming so.
That's where we're at we we did say that we are looking at our whole portfolio, we did say that there.
Or one or two other things in there that that really merit some close attention we'd be.
It would be premature to say anything specific about any of those situations.
But we but we're having.
Regular conversations with all of our.
All of our operating partners and once in a while one or twos conversations a little tougher than the others, but.
For for right now that's probably the most we would say.
Okay and then those other two cover multiple conversations that you may be having I mean is that basically you offering additional support.
Giving them advice and what they need to do or is that could be much more so the significant where you'd have to help them transition.
Part of their portfolio to somebody else.
Yes look it really runs the spectrum and we probably portfolio managed different than others do because we do have these operating backgrounds and we are injecting.
Eric Dave Mark. These guys are all license nursing home administrators, the new Guy that we're bringing in the fridge team licensed or administrator with long deep experience.
And these guys are out in the field.
Talking to them on multiple levels and with multiple.
So depending on what they're seeing and what the opportunities are mean, hopefully, they're just seen opportunities and levers that have or you haven't pulled in and those kinds of things. So.
So those conversations are happening all the time and then mostly mostly mostly go really really well and are very very well received it's it's when you've gone out and you said the same thing five months in a row and they are still not anything happening that you know that the conversation shifts a little bit. So again, we're we're we're very very active on that front, we can't tell our tenants what to do we can make our tenants do anything in their operations, we would never try but we can certainly offer a lot of counselling inside a second set of eyes.
Well for them and again.
Almost all of them are almost all the time very receptive.
Okay, and then related to the senior housing portfolio I believe Dave was mentioning that there are some potential occupancy improvement or there has been some weakness in census, and you are offering some support to get occupancy higher.
What can the operator due to help drive occupancy and is that something that we need to be watching more closely going forward.
Hey, operator can do alone it.
For seniors housing occupancy.
And.
Luckily we've got in our asset management team.
Eric and then the new incoming.
Portfolio manager have actual experience not just nursing home nursing home administration, but running seniors housing as well.
The approach in seniors housing to drive occupancy is really multi faceted, there's internal cultural customer service things there is.
External facing items.
Curb appeal, how you give a tour.
There is a I mean, we could we could go at length and I don't want to take up too much time on that but Eric when he's with those operators.
Hill toward the building will secret shop at a secret shop. The competition will provide great feedback as to opportunities that they have to improve their process to drive that census up.
Okay do you think that the changes.
Have they recently implemented changes that should help occupancy over the next few quarters or has this been going on for some time.
They have recent changes from recent changes in leadership as well.
And so when you when you have a change in leadership.
In organization at a regional or Chief operating officer level.
They bring in their idea is it takes several months to get the water to the end of the ROE but.
Yeah. This is this is recent initiatives that are in place that we're already starting to see some improvement from.
Okay, great. Thank you.
Okay.
As a reminder, if you'd like to ask a question. Please press Star then one.
Our next question comes from Todd Stender of Wells Fargo. Your line is open.
Thanks, Greg you kind of touched on this before with pricing in the skilled nursing space.
You guys have been pretty good about getting 9%.
It's very consistent 9% yields.
It's about as consistent as anywhere in the REIT space, but we're facing historically low interest rates. So does that potentially impact pricing I know, it's it's a different property types.
Kind of get a multiple on cash flow, but what do you think about rates coming in so low.
It's a really good question and certainly a fair one.
And I'll I'll, let.
I'll, let mark weigh in on this too if you'd like but I don't think we're seeing.
Any any impact from rates coming down on cap rates for these assets pricing tends to be what pricing has been.
And it's probably more affected by.
Changes in local markets whats going on in local Medicaid program. For example, you look at whats probably doing theyve already happening in Texas with the failure of the bed tax Bill.
Pricing out there is going to come down and nobody is looking at interest rates move and 25, Bips, one way or the other.
To determine that so I think the answer for US is no Mark do you do you have any color to add to that.
I would just say from a competitive perspective on on buying.
Yes, there's a lot of our competitors are buying assets and taking them to HUD.
As long as higher rates or.
Stay low.
We will impact.
I'd say competition for for buying but from a from a leasing perspective I think.
I think I think we feel were for about as low as we as we possibly can be.
Obviously, you just adjusting for full coverage and.
And every now and again, there's a third.
There is a special asset or two that maybe you'd go below nine.
Because the potential coverage is left.
Once a specific operator is in there.
Maybe it makes sense to and in specific markets like the Bay area that has the highest reimbursement in that country.
For the most part.
I think we feel pretty good about kind of being in that nine to nine and a quarter range.
Phil on like that to a reasonable.
Risk adjusted spread for us.
That's helpful color you know in the sense that maybe this doesn't apply where sellers have better alternatives to sale leaseback financing is that really not the case because it is skilled nursing.
Well you know.
I think theres always been.
Some highly competitive alternatives through refinancing out there for.
For folks who have the wherewithal to do that who could make down payments HUD financing is out there and it's at it's been at.
Rock bottom rates for years and yet we in the reads have.
Not we've we've we've thrived.
Yes, it's definitely competition to us, but an operator, who.
Who wants to do that.
Has to come up with the significant down payment.
They have to wait a long time, we have to invest a lot of money on the front end and we provide.
We provide literally 100% financing.
Can do in a short period of time and we also can bring those operators additional assets.
From our portfolio were from outside our portfolio.
As they want to grow so.
There's definitely competition, but I don't think of that.
Declining interest rates overall are really making a big difference on Mark Yes, I thought I would just I would just add we're not seeing a ton of traditional sale leaseback opportunities I think most of what we're seeing on the market is.
In our in our case purchase put in a new operator, so oftentimes we bring an operator.
To the table and they have a sense of where pricing would be from from a lease rate perspective versus.
Maybe four or five years ago, where you saw many more sale leaseback.
Two existing operator.
All right thanks for that.
And then just I guess looking at DNA unless I missed it.
With GE and I grew up in Q2.
Maybe just a reminder, about your incentive comp and how investment volumes kind of play a role in that.
And then how often is that calculated did that play a role in DNA being up in Q2.
Hey, Todd its bill yes, it does play a role.
Yeah in in the Ics total expense for DNA in in Q2, we had.
While our three targets under our comp plan, our leverage investments and growth in AFFO per share and in Q2, we were off way over from Q1 and on our way to our annual plans. So we caught up our accrual.
As it related to that performance over the remaining part of the year I would expect that.
Yes to be substantially lower than the 4.6.
Total DNA in Q2.
Does that help it sure does thanks a lot.
Our next question comes from Daniel Bernstein of capital One your line is open.
Hi, Good morning, I guess on the West Coast.
Hey, I wanted to ask.
Somewhat.
A different way on taxes, you alluded to cap rates being very specific maybe state by state Medicaid, We obviously know what happened in Texas on the provider tax.
If cap rates are going up and then are you inclined to add geographical into Texas or other states where.
Upright operators are struggling.
No.
Our operators in Texas, that's a great question Barbara is in Texas are not struggling they are doing very well they include enzyme PNG Providence.
Now southwest LTC Nexgen.
I think we've always been very selective about the operators, we put in and the opportunities we pair them with and.
We are looking even though Texas is our second largest state in terms of.
Asset concentration.
Or investments.
I don't think we're definitely in a red lining in this state there may be some some great opportunities there.
As a result of this and we are opportunistic investors and our most of our operators are opportunistic.
Africans mindsets as well so.
We're not we're not looking at it harder than we've ever looked at it but we're definitely not.
Turned off by what's going on over there most of our operators participate in equipped program.
That really goes a long way toward bridging the gap that we're trying to bridge the bed tax proposal would pass to legislative sessions.
And and but otherwise no. If you make the right investments still there's still much to be made in a great state like Texas.
And I suppose make it at the right price as well if if cap rates go up.
The other question I had was you wanting to reviewing the entire portfolio.
And I guess it may be early in that stage, but where are you finding it briefly on the skilled nursing side, where are you finding deficiencies.
That.
You may need to address our operators need to address it on the labor side as much.
Versus.
You know again, maybe state by state Medicaid just trying to understand.
Is there some single item, that's kind of sticking out as maybe something that a lot of operators need to work on.
Yes. Some of those answers are going to be highly state specific I mean, you've been Ohio looked at we looked at what they're doing about their case mix index rates.
You know and other places.
In California.
How are they doing in the queue ace scores and are they going to collect the QHC at the end of the year.
So you really have to know a lot about the local business and.
And.
And what's going on in it and you really have to know a lot about what's going on inside these these.
These operations that's why we were building Eric's team right now Derek is probably on the road.
On average the three days a week and we spent that time in facilities not just talking to the operators with talking to their staffs. He's on first name basis with a lot of the administrators in the buildings that we own and.
That kind of hands on knowledge understanding is.
Is it helps us to see all the little things out there that go into determining whether somebody is going to be successful or struggle going forward.
Okay.
And one last question.
With with PV pm kind of pet.
Eminent.
Coming in October .
Well do you see any of the sellers that are potential sellers out there kind of.
Holding on and waiting to see what will happen or.
Again, maybe any any changes in kind of like the asking price.
In anticipation of PDP up.
Hey, Dan its markets.
I think the general.
Consensus is I think some folks are waiting to see what the what the impact of PDP and well be.
Others, I would say looking at our.
Looking at our pipeline, there's a there's an operator that is wanting to get out ahead of PDP eminent looking to sell.
But I would say the general sentiment in the market is.
Potential sellers or are kind of taking a wait and see approach because if you think about.
Pdps really affects the buildings that are running a higher Medicare census.
And you know not to say that mom and Pops can't run a higher Medicare census, but for the most part they are going to probably be running something a little higher on the on the on the Medicaid.
Occupancy. So there you know there may not be much change.
To them.
Over.
I would say Q4 Q1 next year.
In certain states continue to get.
Increases in the Medicaid rate and so.
I think most most other mom and pops that we either talk to or the investment brokerage community is talking to a lot of them are are taking the wait and see approach just to see how.
Cash flow will shake out as a result of Pdps.
Okay.
Appreciate the color.
I'll hop off thank you.
Thanks.
There are no further questions I'd like to turn the call back over to Greg Stapley for any closing remarks.
Well, thanks, operator, and thanks, everyone for being on the call today, we appreciate the questions and the interest in if you have any additional questions. We welcome.
A call or email and we'll be happy to help so thanks.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.