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Welcome to CareTrust REIT's Q4 2017 Earnings Call. Please note that this call is being recorded. Before we begin please be advised that any forward-looking statements made on today's call are based on management's current expectations, assumptions and beliefs about CareTrust REIT’s business and the environment in which it operates.
These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financings and other matters, all of which are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied here in.
Listeners should not place undue reliance on forward-looking statements and are encouraged to review CareTrust SEC filings for a more complete discussion of factors that could impact results, as well as any financial or other statistical information required by SEC Regulation G.
During the call the Company will reference non-GAAP metrics such as EBITDA, normalized EBITDA, FFO, normalized FFO, FAD and normalized FAD. When viewed together with its GAAP results, the Company believes these measures can provide a more complete understanding of its business, but cautious that they should not be relied upon the exclusion of GAAP reports.
Except as required by law, CareTrust REIT and its affiliates do not undertake to publicly update or revise any forward-looking statements or changes arise as a result of new information, future events, changing circumstances or for any other reason. Listeners are also advised that CareTrust yesterday filed its Form 10-K and accompanying press release and its quarterly financial supplement each of which can be access on the Investor Relations section of our CareTrust website at www.caretrustreit.com. A replay of this call will also be avail5able on the website for a limited period.
I would now turn the call over to Greg Stapley, CareTrust REIT’s Chairman and CEO.
Thank you Latif. Good morning everyone, and welcome. With me are Bill Wagner, our Chief Financial Officer; Dave Sedgwick, our Vice President of Operations; Mark Lamb, our Director of Investments; and Eric Gillis, our Director of Asset Management.
Overall 2017 was CareTrust's best year ever. We posted a record $310 million in new acquisitions. We increased our dividend again while still carrying an industry leading 60% payout ratio. We tamped both the equity and debt markets with robust activity in our ATM and a new $300 million 8-year bond issue finishing the year with 4.6 times debt-to-EBITDA ratio. And now see we're seeing new couple of tenant issues. We still met our normalized FFO guidance of $1.16 for the year. All told, it was a great year and we're well positioned for a solid 2018.
With respect to the tenant issued I'd mentioned, I'd like to update you on one of our tenants Pristine. You recall that in Q4 where they agreed to transition 7 of our 16 Ohio properties to Trillium another one of our operators. The transfer of the 7 buildings on December 1st went very smoothly. This reduced our exposure to Pristine from then over 15% of revenue to less than 7% at year-end run-rate revenue. Trillium reported that the 7 building portfolio was only profitable for December but they posted an approximately 30% climb in monthly EBITDAR over the November same-store results.
Since the transfer, Pristine is continued to provide exemplary patient care in the 9 retained assets, but the financial struggles have also persisted with legacy debt to manage and other changes in their cost structure needed to address the things that caused some of their problems in the first place. In the process, they discovered that is much more difficult to shrink than it is to grow and this is hampered their recovery efforts.
As a result, they've only been able to partially need their post transfer lease obligations, and we've accordingly placed them on a cash basis and reported reserve against their deferred rent and certain other obligation to us. And also as a result, they've now signed an agreement to transition the remaining 9 facilities to other operators selected by us just as they transition the last 7 to Trillium.
We have taken the 9 properties to market, and I am pleased to report strong interest. We already have multiple term sheets in hand from qualified operators to take over the buildings. And we expect to complete those transitions in the coming months. None of those discussions contemplate the reduction in our rental income from the 9 properties and we do not anticipate any interruptions of rents during the transition period.
Pristine for their part is going out of business. They will continue to operate the 9 assets through transition and they have indicated they will focus on their non-CareTrust operations following the transfers. We and Pristine agree then the orderly transition of these nine assets new operators is in the best interest of all stake holders including the staff and patients there. And although we've taken a reserve, we still have a security interest in their accounts receivable to protect this and we’re working with Pristine and they are working capital lender to preserve and maximize value there.
As you can imagine, our experience with Pristine has required us to develop some new skill sets and to broaden others. We’ve taken full advantage of situation to sharpen our underwriting, build and battle test in the unique set of new asset management capabilities and reduce our tenant concentration risk. With these changes in those tenants besides Ensign represents more than 9% of revenues, which was not true 6 months ago. We've also demonstrated our commitment and ability to address difficulties when they occur and on those rare occasions to bring new transparency installed solutions, not just problems.
As always, 2017 presented other obstacles for us to overcome with the challenges we worked through with Pristine have been the only real cloud on otherwise banner year. And a resolution for that one is on the horizon suggesting a bright 2018 ahead. We would like to talk about that now, Dave will address our operator relationship then Mark will provide details on our growth in pipeline and Bill will conclude with financials. Dave?
So, I want to start by saying is that our outlook is more positive than ever. It's hard not to be enthusiastic when you see improving coverage on average across the board and our largest operator the Ensign group, close such impressive result in particular. Again showing the success in the SNF business is less about macro factors and more about the capabilities of individual operators. During the year when many outside observers predicted regulatory headwinds would be instrumental, Ensign actually grew its market share in many of the same-store markets and grew us portfolio covered with us from 2.1 times at the start of the year at 2.17 at year end.
Our upbeat outlook is bolstered by our recent progress in resolving a couple of tenant issues as Greg described, our new lease termination agreement with Pristine will allow us to move the rest of that Ohio portfolio to other operators, and the asset we have already moved are doing very well under their new management. In addition, in December we transitioned four small senior housing facilities in Florida from our former tenant, Better Senior Living and placed them with our existing tenant Priority Lifecare.
These facilities accounted for just over 1% run rate revenues. Better Senior experienced some operational trouble and fell behind in their rent in Q3, while we were willing to work with them to be extent of the challenges were entirely hurricane related. Our asset management team starts deeper problems and we decided to replace them quickly. Since December, Priority has been doing an excellent job of getting the operations back on track.
We also continue to keep a close watch on our two OnPointe facilities, which together account for 2.5 million in rental revenue. Remember, we bought those buildings on a pre stabilized basis at a deep discount as both were recently built and lease up. The affected facility has hit us stride and is performing at the level that we anticipated when we bought it. The Albuquerque building is still working toward full stabilization, but based on our visits that they are building last week, we believe that the operation is on track and will be fine.
They are also closely monitoring global issues that OnPointe that are unrelated to our specific assets. To be sure that they don’t spill over into our properties, if they do we have continuously plans in place. With these two exceptions our operators are stronger than they have ever been. We have been taking all we have learned in continually strengthening our operator embedding process.
Our new operator score card is the most rigorous underwritten tool we have ever seen and is exposing opportunities and highlighting s in our core current and perspective operators in a way that allows us to proactively address the issues and the operator candidates. We continue to focus on the smaller local regional operators whose assets are manageable and core to their business. And we maintained the discipline to say no to the 100s of deals we see each year that would really be growth for growth stake.
In addition to building on the many successes we have had and especially on learning from the challenges, we remained positive about the healthcare market. As we head into our company’s fourth year, we are stronger organization across the board instead of starting the year with one, we had 18 operators and are relatively small size still allows us to move the needle. Speaking of moving the needle, Mark will now discuss the acquisitions market and our pipeline. Mark?
Thanks Dave and hello everyone. Q4 was a great inning to a record breaking year for us. We invested 153 million in new assets across five transactions including the mortgage loan, all of the blended yield of just 9% inclusive of transaction cost. For the full year 2017, we invested 310 million at a blended rate of 9.05%.
Turning to the new deal front, deal volume is down from this time of last year where we are seeing the increased activity over the past few weeks and based on conversations with brokers and intermediaries, we expect to see overall volume increase over the coming weeks and months. In spite of the slow start, we've seen compelling opportunities for us and our operators are ranged from stable to non-stable and even distresses facilities that we view as great long-time investments that we can acquire at low occupancy cost to our operators with significant upside in occupancy, key mix and coverage.
Deal sizing is still predominantly one-off in small to midsize portfolios and as most of you are aware some of our repairs are shady non-strategic to non performing assets. We believe there will be opportunities to reposition buildings with new operators in specific geographically concentrated markets where our operators have scale and strategy advantages.
As we sit here today, our pipeline is currently in the $75 million to $100 million range. The current pipeline includes both on and off market skilled nursing and senior housing yields that we intend to pair with existing and new tenants as we look to build upon our full tenant outstanding operating partners in new as well as existing geographic location.
Please remember when we quote our pipe, we only quote deals that we are actively pursuing which we can yield and coverage 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 in up and close them. Like 2017, we believe 2018 will bring great acquisition opportunities for us and our operators as we continue to apply our strategy of acquiring facilities and pairing them with strong operators.
And now, I’ll hand it over to Bill to discuss the financials.
Thanks Mark. For the quarter, we are pleased to report that normalized FFO grew by 38% over the prior year quarter to $23.6 million and normalized FAD grew by 36% to $24.5 million. Normalized FFO per share grew by 11% over the prior year quarter to $0.31 and normalized FAD per share grew by 10% to $0.32. Given our most recent dividend of $0.185 per share, this equates to a payout ratio of 60% on FFO and 58% on FAD which again represents one of the best covered dividends in the healthcare REIT sector.
Before I go on, let me walk you through the $10.4 million charge we took in the fourth quarter relating to Pristine. As Greg discussed, we have entered into a lease termination agreement with Pristine. As a result, we have concluded that we are not likely to collect on prior accounts owe to us by Pristine as well as cash that we have or will advance for property and other taxes that related to 2017. So, the $10.4 million is made up of the cash advance for tax as of 12-31 of $6.3 million and the deferred rent of $0.8 million and $3.3 million of cash that has or is expected to be paid in 2018, relating to 2017 taxes.
We are only recognizing revenue based cash received from Pristine from rent, and under the lease termination agreement, we expect to receive all scheduled contractual cash rents from Pristine through the transition period. In our guidance for 2018, we are assuming cash rents after the transition stay roughly the same as Pristine's current rents in the year basing this on sign term sheets that we have received or expect to receive shortly.
In yesterday's press release, we announced our 2018 annual guidance the normalized FFO per share of $1.25 to $1.27 and for FDA per share of $1.31 to $1.33. This guidance includes all investments made to date, our weighted average share count of 75.9 million and also relies on the following assumptions: one, no additional investments in our any further debt or equity issuance this year; two CPI rent escalations of 2%; a total rental revenues for the year again including only acquisitions made to date are projected at a approximately $135 million and includes approximately $1.2 million of straight line rent.
Again, we have assumed and expect that the existing cash rents for Pristine will be paid during the transition and after the transition cash rents will be the same or better. Three, our three independent living facilities are projected to do about $500,000 in NOI this year; four, interest income of approximately $1.1 million; five, interest expense of approximately $28.3 million. In our calculations, we have assumed a LIBOR rate of 1.75%. That plus the current group-based LIBOR margin rates of 185 bps on the revolver and 205 bps on the 7-year term loan make up the floating rates on our revolver and term loan.
Interest expense also includes roughly $2 million of amortization of deferred financing fees and six. We are projecting G&A of approximately $12.2 million to $13.1 million. our G&A projection also includes roughly $4 million of amortization of stock comp. As for credit stats calculated on a run-rate basis as of today, our debt-to-EBITDA is approximately 4.6 times leverages about 35% of enterprise value and our fixed charge coverage ratio is approximately 4.7 times. We also have $10 million of cash on hand.
And with that, I will turn it back to Greg.
Thanks Bill. Just the closing note, despite the challenges of both Pristine and Better Senior, we're not ready to concede the occasional tenant failure as inevitable. We're still functioning on the premise that we can and should get operate and selection right 100% at the time. A high standard but while we build for success with our expense of operational backgrounds that same perspective, we are also well equipped to mitigate the occasional unexpected failure. And we would hope our willingness to address issue swiftly and sizably this past years demonstrated to you our unique ability to preserve asset value in difficult circumstances.
We will keep you posted on the Pristine transitions and will be out in the road extensively in the coming weeks to answer questions and discuss the many good things that have happened and will be happening as we put this challenge behind us and continue to execute on our business plans. As on organization, we're stronger than we've ever been in all the ways that count and we're looking forward to an outstanding 2018, we hope this discussion has been helpful. We thank you again for your continued support.
And with that, we'll be happy to answer questions now and at anytime you would like. Lafit?
Thank you, sir. [Operator Instructions] Our first question comes from the line of Jordan Sadler of KeyBanc. Your line is open.
So I just wanted to touch base on Pristine for a second here. What happened that caused things to deteriorate so quickly from the time that you recast the lease in November? That we're moving to this stage and I'm just kind of curious to understand the process and maybe give us some context for why you didn’t just do this all of this in November? Why it had to be sort of where there is a second iteration today?
Yes, third question, Jordan. This is Greg. Listen, the lifeline they were given into the fourth amendment the one we did in November was actually real and doable. The projections look good. We certainly withstand behind them even today, but they acquired a clear level of level fiscal discipline and urgency that frankly Pristine was not quite able to muster. As I mentioned in my prepared comments, it's a lot easier to grow than it is to strength and they just didn’t shrink faster well.
And so, the overhead that they were caring which we felt was excess of even for 16 facilities needed to be paired immediately and it wasn’t. Those weren't the only challenge that they experienced, their cash flows obviously somewhat lumpy, they were caring a significant load of legacy debt and dealing with a lot of vendors that they thought they can hold as they while they work through this and indeed through a certain degree, but they were also always it seems pretty maxed out in their working capital line and that working capital line shrink very quickly following the transition of the 7A assets.
And it kind of was a zillion little thing call it death by a thousand cuts in a lot of ways. In the meantime, they took the care of the operations they seem to have done a great job clinically. They've always been very conscious about, but the answers for their finance struggles just weren’t there. Why did we not do it all at once back in November? Look, this was that these were both negotiated exits. They felt like they could do with the 9 buildings where they haven't been able to do the 16 as successfully as everybody wanted them too.
They and as I mentioned, the plan that they presented for the nine was feasible, just depended on execution and the gap between the projection which is realistic and the execution ended up being more significant that you would want. If you looked at the seven that they were giving up, those seven account or by their account 75% of their losses and the year leading up to December 1 transition. So everything looked fairly good with the nine as we were grafting that deal and as they were insisting they could do it.
What I like to have done this in one fell swoop last fall, absolutely, but again it was a negotiated exit and it allowed us to preserve a lot of value that might otherwise threatened, if we had gone to war and do more things like bankruptcies and all the cost and time. And operation deterioration that that often Intel, which stable to retain and preserve the asset value by doing this in one step with another chance and then in the second step, when the handwriting was on the wall, hope that answers the question.
What was the nature of the 2.3 million of additional payments required under the lease that they did not make? That was obviously not base rent but those payments required as a function of what?
Yes, those centered to triple net lease Jordan. Those additional 2.3 represents property taxes and other taxes that they will require to pay under that triple net lease.
Did they suppose to be impounding?
Well under the fourth amendment, we stop impounding. So they require to pay.
There were some that we impounded in December of 2017 before that stop and they did pay those. I think those also included some debt taxes, their franchise permit fees that are referenced in there. So when you see property and other taxes, in our filings Jordan, the lion share that is really the Ohio Medicaid bad taxes that have to be paid on a quarterly basis.
The other question I have which is on Better Senior. What was the rent concession to the new tenant, I think it's Priority?
Yes, under the -- if we look at it on a combined basis, last year versus this, we have about 3.6 million in rental revenue in our guidance this year versus 3.8 that we would have had last year had even paying contractual cash assurance last year. Remember, Better Senior did not pay any cash fronts in Q3 nor did they pay any cash rents in October and November. Priority took over 12.1 and we started recognizing revenue for all of those facilities beginning that.
Thank you. Our next question comes from the line of Chad Vanacore of Stifel. Your line is open.
I’m just going to stay with Pristine for a second. In the 9 properties that have been transferred, so I’m at this right, contractual rent is currently 9.1 million and you don’t expect a haircut for the new operators?
That’s correct.
And then, what kind of coverage level on EBITDA or EBITDAR coverage, would you expect when the new operators come in?
With the new operators coming in at the rents we are discussing, we expect them to start off somewhere right around 1.3 as an initial going in coverage on these assets.
And then when you are thinking about while you pulled the trigger so fast. What the problem, the operation deteriorating at the facility level? Or was the problem really more in the management side?
That was clearly more on the management side. The assets -- the operations in the facilities I think as we mentioned in our press release yesterday ready for to meet their current obligations. It's just the old legacy debt and the cash flow problems and other things they have with the management level that’s really hampered their ability to do what they might otherwise have done but the operation and the assets are pretty solid shape in our view.
Then one question not related to Pristine but maybe to your other operations that are transferring on the senior housing sector. Overall, you've seen housing portfolio occupancy is dropped pretty substantially. So what’s your outlook for that portfolio as far as occupancy in 2018?
This is Eric, and we feel very comfortable about the occupancy going forward. We have worked with several of our tenants that were in a leased up state and so we have several buildings in the many apples area that are on the level of 90% to 100% occupancy now and as I oppose to lease up there had about 50% occupancy. So we are seeing some of those numbers that are coming up quite a bit. So we feel very confident that these numbers will continue to go up especially with the Florida portfolio with Better Senior transitioning over the Priority. We are already seeing some increase in the occupancies with the handover to priorities. So we feel pretty good about that.
Eric, what do you see on the line of stabilized portfolio rather than the lease up portfolio?
Well, if you look at stabilized portfolio and again with the Florida that has gone up. We have also seen some -- in the Midwest our portfolio has gone up as well with another operator in premiere. Again, we feel comfortable. We have worked to it. That’s a bit quite a bit of time of the skilled with our senior housing operators and we have seen some steady increases over the last quarter. So we feel like going into 2018 that there is set up for some good success.
Our next question comes from the line of Jonathan Hughes of Raymond James. Your line is open.
Thanks for the color for Pristine earlier, glad to hear, it sounds like you are in discussions to find new tenants you are going well there, but is it safe to say that you will be taking a step back from the big deals $100 million plus portfolio deals like Pristine was in 2015? And do more the bread and butter smaller bolt-on added to an existing operators' platform?
Yes, it's fair question Jonathan. My answer would be not necessarily of every deal has this been or fall in some. We underwrite 300 to 400 deals a year maybe make offers on 30 or 40 of them. So we're already being very, very selective about what we do. And big or small the deal is a good deal, it's a good deal. And what constitute the good deal is assets. They're well location, take well taking care of and available at the right price. That can be paired with an operator person foremost, who knows how to operate them successfully in the markets that they're been. So as we find one of those, we don’t share if it's $5 million or $50 million or $150 million, we will likely do that deal.
And if you look at our acquisition pattern, historically, for us to hit in the $300 million range as we've done the past couple of years. It takes one or two of those chunk year deals to get there, even though we still very much love the bread and butter deals, because we them frequently at the right price. And we grow incrementally with our existing operators that we love. So I mean it's all good, we're not turn away any opportunity based solely on the size. And we don't think that the challenges that we experienced with Pristine really having the thing to do with the size of that transaction.
Okay. And that just a kind of leads into next question, but in your expectations for external growth this year, how do you I think you'll give formal guidance there, but how do planned to funding growth if the equity markets don't provide you on a combinative cost of capital. And maybe what's pricing shaking out on any deals you're seeing?
Yes, remember we've only been around for not even quite 4 years. And capital markets we're not that accommodated to it, even as recently as two years ago. So we kind a know how to work in the market that's a little bit hostile. It's at what this is. I don't think that's what this is, but we just continue to do what we do. So spread investors, which still looking at deals in terms of how accretive they are.
Our cost of capital will fluctuate from time-to-time, it's obviously gone up in this market partly probably due to the challenges we have with Pristine that we're now solving, but also partly just due to macro issues for all the REITs. And so we are all taking those challenges and stride. We will adjust as needed, again we will go out and continue to find accretive deals and do a very best to match fund our debt and equity usage to those deals so that we create shareholders value. That's what we do.
Okay. And then any just update on pricing? Has that moved up recently on deals you're seeing out there?
Hey Jonathan, it's Mark. I guess it's really similar to the mixed bag out there. I think you have place like California, Florida, Virginia, Maryland that continue to they're hot today as they've ever been. And I think you have some pressure maybe in the Midwest with kind of tertiary, secondary markets where you've seen pricing come down. But from a SNF perspective, there is still a lot of private money chasing skilled nursing assets.
So, occasionally you'll see on a distressed or non-stable basis you'll see maybe the bid to ask spread kind of narrow but for the most part it's still the SNF in this is there is not a lot come from those volume perspective on the market so the buildings that are out there and they are getting a lot of interest and so we haven't seen pricing to come down drastically but we probably expected to over maybe years over the short-term but it's still kind of early to say than here.
Okay, and then one more maybe for Dave. Are there any other properties that are on the watch list that weren’t mentioned in the prepared remarks so either underperforming relative to your underwriting expectations?
I think we've been really transparent in sharing kind of ahead of schedule some of the things that were monitoring closely right now with that I get my prepared remarks I think that it covers the world that as we sit today of what we are paying -- spending lot more attention on. So I don't know if Eric has anything to add to that?
I think that we have seen some really good growth in the lot of our SNF operators. It's exciting to see a lot of these guys are increasing their coverage and we've been on to the buildings a lot over the last quarter last half of the year and are really excited with the growth with these to be as operators and excited to grow with them. I feel like we've got a really good stable a group of operators that we are working with now that we just like to continue to grow with.
Our next question comes from the line of Michael Carroll of RBC Capital Markets. Your line is open.
Greg, can you provide some color on the total portfolios coverage ratios, maybe what is the coverage ratio, if we exclude the Ensign lease from that calculation?
Michael, we have not published that number but if you pick up Ensign at 2.17 times 44% of our revenue I think you can get there.
And then I guess, how should we think about those portfolios outside of Ensign, I mean, where have -- where they distribute through the, I guess, through the cap or the coverage ranges? Is there anything that's below 1.2 times? And how should we think about that?
I'm going to let the Eric to answer that question.
From a skilled nursing side, we're seeing a lot of increases actually in our portfolio especially over the last quarter or so. For example, Cascadia Healthcare which is a great partner of ours in the Idaho market, their coverage continues to increased, and we have others that are along those same line. We have a great operator in Southern Illinois by the name of WLC, and their coverage continues to as well and we've take down some facilities to their portfolio because of the great coverage that they have. And so we're really starting to see a lot of these field nursing facilities that with all the negative press and everything out there. This last year, we're actually seeing with the exception that Dave talked about. Our skilled nursing coverage is doing a great job and staying stronger increasing in some of the aspect.
And what's the portfolio skilled mix today and what was it 12 point figure?
Again, that’s not a number that we’ve calculated and disclosed. Eric, do you want to provide some color around this skilled mix though in the buildings?
Are you talking about skilled mix in the buildings or skilled mix of our portfolio?
Well, within the buildings and how has they trended and that’s what's been under pressure recently in the market, as you're seeing reductions in the Medicare length of stays. Has that impact your portfolio? I know CareTrust has typically bought lower skilled mix buildings, the plan of having the operators bringing more Medicare patients and seeing some profitability improvements that way. Has that underwriting kind of worked out? Has the skilled mix trended higher within your portfolio while it's probably turning a lower throughout the industry in general?
Okay, yes, question understood. So I would say that we have some buildings that we brought on this year that where they were -- what we would call have a distressed asset, so to say. That the operators been able to come in and increase that skill coverage or increase the skilled mix. I've been up in Washington and building our portfolio there and we’re seeing some increases in the skilled mix that they have there as well as a lot of our skilled operators and on the west.
So I would say that we've seen in increase in some of that skilled mix new building. We still feel like that the Medicare business is, has been stable and strong and our operators continue to focus on that but they can, we’ve seen ticks up, some uptake on skilled as well and a lot of our portfolio.
And Mike this is Crag, I just want to tack on to that, and just basically, what we do talk about operators who want to move there skilled mix up and that’s a great strategy and it was great Prestige Ensign and has been good toward there operators. There is also great strategy in just running straight Medicare shops and we have some operators that do that very successfully. Just to be clear in those places where Medicare and other managed care is skilled a patients or the strategy we feel like tenants are doing very well. We don’t have any concerns about anyone out there on their front but not everybody is perusing that same strategy, there is other ways to make a bot.
Thank you. Our next question comes from the line of Daniel Bernstein of Capital Securities. Your question please.
I get the question I have it revolves more around, how do you think about how much of your portfolio is some form of turnaround or operational upside and maybe turnaround is not quite the right word for some of the asset, but from an investment strategy it seems like you’re heading more towards buying some more assets that have this operational upside or lease up need. And so just trying to understanding how much risk, how do you think about the risk within your portfolio from a turnaround operational standpoint? And how much do you want to say gone in future acquisitions?
Thanks Dan this is Greg, listen Mark talked briefly about the attractiveness of some of the distressed assets turnarounds that we do see out there in the market and successful turnover operator of experience. Also some of the assets that we have acquired on a pre-stabilized basis and not necessarily turnaround they are just new, where you get a great asset at a great price, you put it into great operator and it performs and we have seen that in our portfolio.
Even though, we have talked about that we don’t want you to think that’s primary strategy. We still look to stabilized assets, stabilized operators, one stabilized operations. Probably less than 10% of our portfolio is somewhere -- is not where we are, probably we are it will be lower than that but its where our tolerance level would be for those kinds of assets which can be very nice additions to a portfolio like ours with kind of oversight that we can provide.
When you buy those assets, how do you pickup that operational upside with senior income? Is there rent resets down the road? Is it just given the maybe slower response of the lease coverage pops up and looks better on the overall coverage? I’m just trying to understand how the benefit just on the extra yield you might get on the investment or are you picking up some additional income down the road as well when you structure those type of investments?
No, we might pick up a little extra yield on some of those kind of assets, but we are really not looking to participate heavily or even at all, in the upside of those. Understand that, that operator who step-in into a pre-stabilized asset is also taking a risk with us. And the advantage for them stepping into that as they can fix their occupancy cost at fairly low rate with miles in CPI based escalators over a long period of time. And they're entitled some reward for that risk, so we are just happy to get the coverage that comes as they do that work. And that’s where our focus really is. Our upside our reward is in enhanced leased coverage down the road.
And maybe some additional yield upfront right, the other question I had was going back to the acquisition pipeline. If you are seeing a lot of private equity or competing out there, have you thought about stepping back at all from the level of acquisitions that you have done in prior years? Or is that just not -- and you are still seeing another deals that in the range that you can make it accretive that you want to continue at the same level budget? I’m not asking for guidance but per se, just a general view, most recently this past quarter I have looked into your stock price and publicly said we are pulling back and you guys had very different tone. So I’m just trying to understand, how you are looking at the acquisition market relative to past years?
Hey Dan its Mark, I’d say as we look at the opportunities that are out there, we discussed volumes were down last year, we underwrote 460 transactions. So pairing assets that make sense for our operators strategically, I mean, it’s not -- you are not going to hit on even single digit percentages of those type assets that kind of fit the box. So we are out looking for opportunities that as Greg said to grow our lease coverage with our tenants. And so, I think that's where we said we've been $75 million to $100 million over the past two years.
Our strategy hasn't changed. And we continue to refine our underwriting. And as we add new operator we continue to look for those one of these two of these. And occasionally if a bigger chunk of your deal comes along that fits our underwriting we'll do that. But our strategy hasn't changed. Volumes are down, so that just means we got a work a little bit harder and dig a little further to find opportunities. But I think overall I think we should be fine in 2018. I think the opportunity should be there.
And your next question comes from line of John Kim of BMO Capital Markets. Your question please.
Apologize, if I missed this and you've talked about earlier. But can you tell average on the improved performance of the assets that were transferred from Pristine to Trillium?
Yes, thanks for the question, this is Eric. We've seen about from November to December 30% increased in their EBITDAR and from the same shop. So we see -- will come on, and that was even before a lot of the managed care contracts were in mind. And so now we're seeing, it took until about February, the February 1, where they got all the contracts in mind so they could start accepting more patients, and so largely that was done with the 30% increase in cost control. And so the census was stayed about the same. But now, we're seeing that in February, because they have the opportunities to accept managed care patients, which is a great population in Ohio. We can see even more build up from a revenue perspective. So Trillium done a great job. We expect them to continue to increase and excited about the future with those 7 buildings that they took on.
Yes, hey John this is Greg. I'll just add on it anecdotally that as we have been discussing the exit with Pristine, naturally we felt like Trillium with the great job that they've done great relationship that we have with them and their willingness to step into those 7 buildings on relatively short notice during the holidays. We owe them a chance to take look at the one or more of the 9 that are coming down the road. So we sold them one that is very nice building. That operationally covers of about two times. And ask if they would like to step into that. And their answer was absolutely enlightening.
They said, you know, we love the building. We'd like to do it at some point, but right now we're very focused on what we've got. And we're not going to grow again until we know that we have digested the acquisitions that we've taken. That is exactly the kind of answer you want to hear from one of your tenants. And the answer that they gave and we're really just as pleased as can be with that kind of discipline in the portfolio. We hope we'll be able to grow with them further at a future date as they are ready to do that. But this apply they're performing well in the assets right now and the proofs and putting they're doing great out of the gate.
But that improved your EBITDAR performance, is that comparing Trillium since they cover versus Pristine right before that they hand it off? Or is that just an improvement since they're taken over the operations?
No, that was the sequential results from November to December. And as Eric pointed out, they were kind of working with one or in tied behind their back because they didn’t have it took a while for to manage their contracts from three so that they give at mid patients and that all we've take so far to make the adjustments you need to make as we go through one of those transitions.
And then as far as transferring remaining assets how you think Trillion is potentially on the table or is it really off the table and so they absorb the….
Trillion has indicated that they are not a candidate for those, but we have several all other excellent candidates some who are in Ohio now other two are would be coming to Ohio all of whom were highly qualified operators of significant heft and who are very-very interested and we already have as we mentioned couple of term sheets in hand for some or all of those assets.
And then now with the Pristine announcements are you opening up your ATM again because I think that was the reason why you didn’t use it in the third quarter I was wondering if that was the reason for the fourth quarter as well.
Yes, I'm not sure if we like the stock price right now, but the all the news that's people need to know really is out as far as we know and so we wouldn’t have any columns about turning down the ATM or free sale like we had a need and the market was there as I mentioned earlier we are very careful about being sure we match fund raises to our growth and so we will be watching that closely.
And then the final one from me can you just remind us on Page 6 of your supplement to current yields how that is calculated were showing the numeric just of the cash number or the GAAP number?
It's a cash number.
Okay, so the Pristine was been reflected in this or it is a part of it's the original assets that we're transferred. I'm just asking about the sequence of the client it went from 10.2 to 9.1 to 9.
Pristine would have been in the new cash. Yes, its cash yields based on that are going in cash yield so the rents adjustment that we gave Pristine last year is not reflected in the 2015 investment line item when we originally did that transaction.
John, just to add-on to that one, you can see what the current rents are and the investments that we made in those properties on Slide 8 of the supplement.
Our next question comes from the line of Jordan Sadler of KeyBanc. Your line is open.
I just wanted to come back regarding the Pristine payments that were not made and not to harp on it, but with those payments reflective of to a current obligations or prior obligations? In other words, they made -- that $4.9 million of base rent obligations since your recast the lease, but they sale to repay 2.3 million of obligations under the rent. I'm trying to understand, if they were unable to pay 30% of their obligation or 32% of their obligations since those leases were recast or if some portion of that 2.3 million was from prior period.
Yes, Bill, go ahead.
The 2.3 that we were referring to -- the 2.3 relates to 2017 obligations under the lease. So like property taxes that are paid in for the prior period. Does that make sense?
Yes, it does. I mean I guess then the two are comparable it would seem, assuming this would have been obligation that were reflective of the fourth quarter or reflective of November, December, January whatever. What I'm getting that it’s a very significant mess the inability to pay that, they are behind and they are not meeting their obligations they are missing their obligation by factor of 32%. And so what I'm trying to understand is when we get to 1Q report or the 2Q report, how are we suppose to have conviction that the underwriting that you guys are anticipating or that you done surrounding these properties that the new potential operator or tenant will be able to meet these. What why they miss that badly or what is driving that big amount?
Okay so let's -- on the 2.3 approximately 1.3 relates to bad taxes that are all for Q4 payable on 2018, 1 million of the 2.3 relates to property taxes for all of 2017. When we get the EBITDAR, EBITDAR performance from the properties, they include -- they are on accrual basis. So there is a property tax accrual, every month for bad taxes and property taxes. Those EBITDAR generally last year for Pristine would have showed that income.
The problem that Pristine ran into during 2017 is the cash collections that came in were not sufficient enough that went bills came due likely there are to pay those bills. They're bad debt expense for last year was recorded at 2%, but there actual bad debt was more like 6%, so that gap of 4% on say they have a 100 million of revenue that 4 million of bucks that missed cash collection can pay a lot of these types of bills.
So we think going forward with an operator that is call it more disciplined around cash collections and focuses has better processes and procedures around it will produce a better results on cash collections and have a lower bad debt expense. We benchmark Pristine against another tenant in Ohio and their bad debt expense was less than 1%. So we know it can be done, it just wasn’t done during 2017 by Pristine.
This is Greg, Jordan. Nor was it done post the fourth amendment last fall, if it had been done and we are in the processes doing it, it was just it was very slow and it was very lumpy. If they had done, I don’t think we will be having any of these conversations about them now, but their inability to move that -- they were moving it very nicely in October and November making progress on it, but they sort to hit a wall in January and that’s where they have been stacked.
And one another question just leverage Bill, what sort of the appetite? I know for six I feel like you are at right there within the range for where you would normally like to be. So what’s the appetite to lever up incrementally in the near term in order to continue to close deals and execute on the acquisition front?
Yes, our stated range is four to five times on a debt to EBITDA, when we came out Jordan we were well above that. So we are comfortable managing the debt down some high levels. We have also been below four. Last year, we were in -- we had three handle on the debt to EBITDA. So, we want to play between four and five times, but depending upon investment flow and how deals hit we'll kind of guide where that where the leverage goes. So, I guess what I’m saying is if we have 40 million to 50 million in deals over the next couple of months, we would likely to put them on the line over the short-term. And maybe use the ATM to call it match fund to portion of it.
Thank you. And this time I’d like to turn the call back over to Mr. Stapley for any closing remarks, sir?
Thanks, Latif, and thank you everybody for being on the call. As I mentioned earlier, we are happy to answering more questions that you have. You know where to find us and we will be out on the road here in next few weeks and I hope to see you then. Take care.
Thank you, sir. Ladies and gentlemen this concludes today’s conference. Thank you for your participation and have a wonderful day.