Caretrust REIT Inc (CTRE) Q4 2018 Earnings Conference Call Transcript

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CareTrust REIT Inc (NASDAQ:CTRE)Q4 2018 Earnings Conference CallFebruary 14, 2019, 1:00 p.m. ET

Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to CareTrust REIT fourth quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press * then 0 on your touchstone telephone. As a reminder, this conference may be recorded.

I would now like to turn the conference over to your host, Miss Lauren Beale, CareTrust Controller. Ma'am, you may begin.

Lauren Beale -- Controller

Thank you. Welcome to CareTrust REIT's Q4 and fiscal year 2018 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 business and the environment in which it operates.

These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financing, and other matters, all of which are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied herein

Listeners should not place undo reliance on forward-looking statements and are encouraged to review CareTrust's SEC filings for a more complete discussion of factors that could impact results as well as any financial or other statistical information required by SEC Regulation G.

During the call, the company will reference non-GAAP metrics such as EBITDA, FFO, and FAD and normalized EBITDA FFO and FAD. When viewed together with its GAAP results, the company believes these measures could provide a more complete understanding of its business, but cautions they should not be relied upon to the exclusion of GAAP reports.

Except as required by law, CareTrust REIT and its affiliates to not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances, or for any other reasons. Listeners are also advised that CareTrust yesterday filed its Form 10-K, an accompanying press release, and its quarterly financial supplement, each of which can be accessed on the investor relations section of CareTrust's website at www.caretrustreit.com. A replay of this call will also be available on the website for a limited period.

Management on the call this morning includes Bill Wagner, Chief Financial Officer, Dave Sedgwick, Chief Operating Officer, Mark Lamb, Chief Investment Officer, and Eric Gillis, Director of Asset Management.

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

Greg Stapley -- Chairman and Chief Executive Officer

Thanks, Lauren. Good morning and welcome, everybody. 2018 started as a somewhat difficult year for us here at CareTrust, but we're pleased to be reporting that we finished the year with FFO per share of $1.28, which was in line with both consensus and our guidance and a net debt to EBITDA at year end at an all-time low of 3.3 times. It was actually really a little bit better than that. Had we left our at-the-market program in the barn during the second half and avoided the dilution we took, we still could have posted a net debt to EBITDA well below the low end of our target range of four to five times.

However, as the year wore on, we saw on the horizon both clouds and opportunity, which are frequently, as you know, the same thing. So, with imminent deals in the pipe and a constructive view for 2019, we deemed it prudent to reduce debt and increase liquidity. As most of you know our fundraising philosophy, whether off the ATM or through secondaries, is to do our best to match fund our equity raises as closely as possible to our capital deployments. Using the ATM allows us to raise equity capital at a fraction of the cost that a secondary would carry and we can turn it off and on based on our sense of the market and our view of our pipeline at any time.

Q4 demand in particular for our equity was robust and through the quarter and since, we've raised $98 million off the ATM. This matches nicely in amount, although not perfectly in timing, with the $100 million in new investments we've made since October 1st. Although these last couple of announced deals closed later than expected and were thus unable to contribute to 2018 earnings, we believe that the accretion they represent going forward was well worth the short-term deceleration in our FFO per share growth.

So, we're happy with where we've been and even more excited about where we're going. We've closed on $53 million in new assets already in 2019 and as the 8-K we've filed at the January illustrates, we stand on the cusp of another new growth opportunity, which if we can get it successfully closed would surpass in size anything we've done to date. After those investments, we'll still have plenty of dry powder.

We've just expanded and extended our revolving credit facility, moved the maturity on another $200 million of our debt out to seven years. We're still seeing substantial interest in our equity. We have $22 million of cash on hand and our conservative payout ratio will give us another $30 million to $40 million in retained cash that we can deploy in the remainder of this year.

This matters immensely as we contemplate a real estate cycle which by some accounts -- and we're not taking a side or making any predictions here, but some might say it might be getting a little bit long in the tooth. So, we're ready for whatever opportunities may arise and we plan to carefully manage our assets and the balance sheet to remain ready as the cycle plays out over the next couple of years.

With that, I'd like to turn some time over to the team to fill you in on the details. Dave will talk a little bit about our current assets and operators and Mark will discuss recent acquisitions and opportunities. Then Bill will wrap up the financials. Dave?

Dave Sedgwick -- Chief Operating Officer

Thanks, Greg and good morning. Our strategy has never been to grow for growth's sake. 2018 was the year where the value of that discipline was proven. As Greg mentioned, there were plenty of opportunities to overpay. You said we held our ground and used the lull to position ourselves for better acquisitions in the future. They have begun to come, but I'll let Mark talk about that pipeline in a minute.

As usual, let me update you on changes in the portfolio, starting with our newest new operator. Tennessee-based Providence Health Group joined us in Q4 through a single-asset acquisition in West Virginia. Providence is owned and led by respected skilled nursing veteran Doug Cox. Doug has assembled a great team of operational, financial, and clinical talent to operate ten facilities in the middle of the country. The first couple of months in our new asset have been terrific and are now looking to add facilities to their master lease.

In other parts of their portfolio, we've seen our operators make some tremendous strides, particularly in some of the pre-stabilized assets we acquired in late 2017. I'll give you a couple of examples. Cascadia Healthcare, based in Idaho, took over several Kindred and Orianna buildings. Adding those facilities immediately took their master lease coverage down to levels that in any other setting would be uncomfortable for both landlord and tenant.

However, turning around non-stabilized facilities is something they know well and for which they have a proven track record and is something we're intimately familiar with as well as former turnaround operators ourselves. So, we didn't panic when we saw the expected dip in coverage, which often happens during the first 6 to 18 months of the turnaround or repositioning depending on the size and complexity of the job. We're really impressed with the solid work that Cascadia has done. If you ask them, they'll say they still have a lot left to accomplish, but they're overall trailing three annualized coverage today as back up to about 1.8 times.

Another example is Texas and Louisiana-based PMG. They had a similar experience as they tackled the three Texas Kindred facilities we acquired for them in Q4 of 2017. Predictably, the first several months produced choppy results as they absorbed the new acquisitions and incorporated their operating model into them. We were also carrying out significant CapEx projects in all three. Part of deal with them included us funding the CapEx for a strategic repositioning of these assets, which impacted operations as well. So, they've had their fair share of headwinds as they've worked to stabilize the buildings.

Nevertheless, looking at the trailing four annualized numbers as of November, their lease coverage in those buildings is now approaching three times and they're still not quite done with the last remodel, just a sampling of what great operators can do with good, pre-stabilized opportunities. We're pleased to be associated with these two great operators and several others, both in our portfolio and waiting in the wings.

So, we're staying firmly focused on our operator-first model. We are continuing to look for more and better ways to evaluate, monitor, educate, and support our tenants and their operations. As I previewed on the last earnings call, effective January 1, we've added the qualitative data from PointRight to our operator scorecards.

This qualitative facility and market data is further strengthening our underwriting and asset management processes. Perhaps more importantly, our contract with PointRight allows us to give their data to our smaller tenants who would otherwise be unable to afford it themselves. They can use it to make smarter and more timely management decisions, improve operations, and enhance their ability to compete in the narrowing network environment.

Finally, looking at the broader skilled nursing industry, the landscape remains stable with no major changes from last quarter. Our operating experience, our operators in the stable reimbursing environment and the coming new PDPM reimbursement model combine to inform our positive outlook on the sector, even during this lull before the long-rumored demographic surge starts to make an impact.

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

Mark Lamb -- Chief Investment Officer

Thanks, Dave and hello, everyone. In Q4, we closed approximately $31 million in investments, acquiring three skilled nursing facilities. In the process, we added, as Dave mentioned, a great new tenant in Providence Health Group and tacked on a facility apiece to our existing master leases with Metron and Eduro. We also invested $4.4 million in revenue-enhancing CapEx into the portfolio. These acquisitions brought our total investments for 2018 to $116.4 million.

Just a note about underwriting, although $116 million is a pretty light year by our standards, we are not unhappy with the result, since it reflects a discipline that we believe is critical for our long-term health and success. It can be hard to pass on deals when they can be had just by lowering our underwriting standards a little or by focusing more on a broker's rosy pro forma than an asset's actual performance. We learned long ago that getting pricing right, although it's not a guarantee of success, improves the chances of succeeding immeasurably, while overpaying is rarely anything but a prelude to pain. So, we stuck to our guns and we are now poised for a hopefully outstanding 2019.

And those hopes are starting to be realized. As you might correctly imagine, we spent much of the third and fourth quarters moving the ball on the recently announced Q1 transactions and beyond. In January, we purchased Oakview Heights in Illinois for $9 million as a tack on for our existing tenant, WLC Management.

Earlier this week, we closed on a four-building sale leaseback with another existing tenant, Covenant Care, for just under $44 million. This transaction allowed us to consolidate and eliminate three separate short-term stand-alone leases that we had picked up in a prior deal, enrolled them and the new assets together into a single unified long-term master lease with Covenant Care.

Lastly, as Greg mentioned, we recently AK'd a definitive agreement to purchase 12 facilities in the Southeast for $211 million, which we currently anticipate will close in Q2 if we are successful in obtaining the several remaining approvals and transition agreements. Moving to our pipeline, it sits today in the $275 million to $300 million range and is almost exclusively made up of skilled nursing assets. It includes projected tack-ons with existing operators as well as deals that we can pair with new operators.

Please remember that when we quote are pipe, we only quote deals that we are actively pursuing, which means that yield coverage and underwriting standards that we have in place from time to time and then only if we have a reasonable level of confidence, we can lock them up and close them. Now, I'll turn it over to Bill to discuss the financials.

Bill Wagner -- Chief Financial Officer

Thanks, Mark. For the quarter, we are pleased to report that normalized FFO grew by 14% over the prior year quarter to $27.1 million. Normalized FAD also grew by 14% to $27.9 million. Normalized FFO per share grew by 3% over the prior year quarter to $0.32 and normalized FAD per share also grew by 3% to $0.33.

Given our most recent dividend of $0.205 per share, this equates to a payout ratio of 64% on FFO and 62% on FAD, which again represents one of the best covered dividends in the healthcare REIT sector.

We have continued to strengthen our leverage and liquidity positions, to that, for the quarter and through today, we have issued 5 million shares at an average price of $19.73, resulting in $96.7 million of net proceeds. For 2018 and year to date through today, we issued 12.7 million shares resulting in $227.3 million of net proceeds. We also just closed on a new $600 million revolver and a $200 million seven-year term loan, reducing our borrowing costs again and pushing our earliest debt maturities out to 2024.

With proceeds from the term loan we paid off the entire revolver. We also have $22 million of cash on hand as of today. Today, we have just $5.8 million in authorization left on the ATM, so we plan to put up a new one shortly. As Greg noted, we intend to use it to match fund smaller deals when we can and for larger deals, we can still raise equity via overnights. We intend to do so judiciously as long as health and intelligent growth of CareTrust has been paramount in our decision making and we intend to keep it that way.

For guidance in yesterday's press release, we initiated our 2019 annual guidance range projecting normalized FFO per share of $1.30 to $1.32 and normalized FAD per share of $1.35 to $1.37. This guidance includes all investments made to date, the recently completely credit facility amendment, a diluted weighted average share count of 88.6 million shares, and also relies on the following assumptions.

One, no additional investments or dispositions, nor any further debt or equity issuances this year. Two, inflation-based rent escalations, which account for almost all of our escalators at an average of 2%. Our total revenues for the year, again, including only acquisitions made to date are projected at approximately $153 million, which includes approximately $1.8 million of straight-line rent.

Three, our three independent living facilities are projected to do about $500,000.00 in NOI this year. Four, interest income of approximately $2 million. Five, interest expense of approximately $26 million -- in our calculations, we have assumed a LIBOR rate of 2.5%. That, plus the newly reduced grid-based LIBOR margin rates of 125 BIPs on the revolver and 150 BIPs on the seven-year term loan make up the floating rates on our revolver and term loan.

Interest expense also includes roughly $2.1 million of amortization of deferred financing fees. And six, we are projecting G&A of approximately $12.8 million to $14.2 million. Our G&A projection also includes roughly $4.4 million of amortization of stock comp.

As for our credit stats, stats calculated on a run rate basis as of today, our net debt to EBITDA is approximately 3.3 times, leverages about 20% of enterprise value, and our fixed charged coverage ratio is approximately 6 times. We also have $22 million of cash on hand.

With that, I'll turn it back to Greg.

Greg Stapley -- Chairman and Chief Executive Officer

Thanks, Bill. We hope this discussion has been helpful. We thank all of you again for your continued support. With that, we'd be happy to open it up for questions. Valerie?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press * then 1 on your touchstone telephone. Again, if you'd like to ask a question, please press * then 1. One moment for our first question. Our first question comes from Jordan Sadler of KeyBanc Capital. Your line is open.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Thank you and good morning. The first question is regarding the 8-K and the commentary. Mark, you offered the portfolio that you guys are under contract on, that $211 million. Is there any incremental information you can share regarding that portfolio, surrounding markets or coverage? That would be helpful.

Greg Stapley -- Chairman and Chief Executive Officer

This is Greg. Honestly, we've tried very much to downplay that transaction. We had to file the 8-K because the SEC regulations require an 8-K to be filed when a material agreement is entered into, even if that agreement contains multiple contingencies and diligence and other hurdles left to clear. We're not out of the woods on that yet. We do have a number of things that have to be done yet. There are multiple parties involved. We really don't have the permission to talk very much about it. We will give you more information as hurdles are cleared and a hope for closing draws near.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Are there any milestone dates or events that we should look for?

Greg Stapley -- Chairman and Chief Executive Officer

Yeah. There's a number of things that have to be done, but the situation is a little bit fluid. Yeah, there are some approvals that have to be obtained and I'm not sure we have to be exactly what dates those approvals have to be obtained by. We do know there are some regulatory filings that have to be made here this week and those are being made. So, right now, I will tell you that it's so far, so good. But we're not counting our chickens before they hatch.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Would you say if these assets are in an existing market or not?

Greg Stapley -- Chairman and Chief Executive Officer

Some are and some aren't.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Are they also included in that pipeline of $275 million to $300 million?

Greg Stapley -- Chairman and Chief Executive Officer

Yeah, they are.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

And then maybe one for you, Bill -- in the guide, what's the escalator embedded in the guide for the year?

Bill Wagner -- Chief Financial Officer

2%.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay. Thanks. I'll hop off.

Operator

Thank you. Our next question comes from Jonathan Hughes of Raymond James. Your line is open.

Jonathan Hughes -- Raymond James -- Analyst

Hey, good afternoon or good morning on the West Coast. On the $43 million Covenant deal announced earlier this week, that was a sale and lease back, which is not your typical turnaround strategy. I realize that was an existing relationship, but do you see more opportunities for those traditional sales lease backs with your existing operators for properties they operate that you don't already own?

Bill Wagner -- Chief Financial Officer

There are a few operators that own some real estate, but I think for the most part, those opportunities are few and far between. As you know, a good chunk of our operators have given them their start and have kind of launched them and then there are more mature operators that have some existing buildings and those existing buildings are a combination of leased assets. I wouldn't say this would be the norm for us.

Greg Stapley -- Chairman and Chief Executive Officer

Yeah, Jonathan. For Covenant Care in particular, between the four assets and five assets we took the mortgage on, that represents the last of their owned real estate for them.

Jonathan Hughes -- Raymond James -- Analyst

Fair enough. Then maybe one for Dave -- I was hoping you could talk about Texas, where you derive about 20% of rent. Can you talk about skilled nursing fundamentals for the portfolio there, maybe occupancy or coverage and how your portfolio is performing and what's been characterized as a challenging market by some of the other skilled nursing operators there?

Mark Lamb -- Chief Investment Officer

Hey, Jonathan, this is actually Mark. Since I cover Texas, I can probably take this. As you know, our two operators in Texas are Ensign and PMG. Dave's comments with respect to PMG were the three kindred assets that we took over. They continue to do well in those assets and there are four other buildings that we acquired back in 2016 with them that they continue to do well in.

So, I think it's safe to say that our portfolio in Texas is performing well, though I don't necessarily have coverage metrics at my fingertips. That state, the Medicaid rate, it's no secret, is not great. I think it's second to last of all the states in terms of Medicaid rate. But from a fundamental perspective, developments come way down. You don't see buildings popping out of the ground like you did three or four years ago.

And then there are obviously some troubled operators that are currently going through some things in the state. The good flexible operators that we target, the Ensigns, the PMGs of the world, have been able to manage the roadblocks. We think is the bed tax going to pass? Possibly. We still very good about the operating metrics of the tenants we have.

Jonathan Hughes -- Raymond James -- Analyst

So, of the 35 or so properties you have in Texas, 25 or so are Ensign?

Greg Stapley -- Chairman and Chief Executive Officer

Probably 28 because seven are PMG, right?

Mark Lamb -- Chief Investment Officer

Yeah.

Jonathan Hughes -- Raymond James -- Analyst

Just one more and maybe this one is for Dave -- PDPM, it's supposed to be budget neutral, most projections for operators, at least the projections I've seen, are positive or break even. Is there a chance that revenues would ultimately fall short? I'm just trying to understand the downside to PDPM since most only talk about that upside opportunity.

Dave Sedgwick -- Chief Operating Officer

This is Dave. That's a really good question. It's tough to comment on the entire industry. But I'll give you a little anecdote. Eric and I were meeting with one of our Midwest operators a couple weeks ago and as we were drilling down deep into their operations, we did talk about PDPM. They use the largest electronic medical record system in the states right now, I believe, and that's PointClickCare. PCC is doing analysis and doing projections for all of their customers.

For our operator that we were with, they showed a significant increase to their revenue, which is great because most of that is going to drop to the bottom line and not even factoring in efficiencies they're going to get by having the flexibility around their therapy cost. I asked the same question you're asking, which is, "I bet they say that to all the girls."

His response was, "Actually, it's about 50-50." When they talk to PCC about that, PCC said that, "This is a fun call we're having with you, but they don't all sound like this." Some people are in a situation where they have to make some serious changes or they're going to be in a tough spot.

So, I think that's good news because if everybody, of course, does much better, than you might see a situation like we saw in 2011 with RUG-IV, where they reversed course really quickly. But as we can view the future, it looks like there are going to be winners and losers here. Even for those who may not be winners on the topline, they will have the flexibility with how they staff therapy to do better.

Jonathan Hughes -- Raymond James -- Analyst

That's great. You have no operators in your stable in that latter camp where it would be concerning.

Mark Lamb -- Chief Investment Officer

Not that we're aware of. We haven't done that deep dive with everybody on PDPM. The operators we have talked to are positive.

Greg Stapley -- Chairman and Chief Executive Officer

Yeah, it's Greg. I would just add one thing. Dave mentioned we're still talking to our operators about that. Something new we're doing next month, we're holding an operator conference in Southern California for all of our skilled nursing operators to come in. PDPM will be front an center on the agenda for discussion there. So, by this time 30 days from now or so, we should have all those answers in the bag.

Operator

Thank you. Our next question comes from Chad Vancore of Stifel. Your line is open.

Chad Vanacore -- Stifel Nicolaus -- Analyst

Thanks. Historically, your target leverage has been in that four to five times, but you're currently sitting under-levered around 3.3 times. Should we think about you remaining on the lower end of that historical range through 2019 popping back up to the middle of the range through acquisitions?

Bill Wagner -- Chief Financial Officer

Hey, Chad. It's Bill. All that will depend on investment flow and where our equity is trading as we continue down 2019. But I think for modeling purposes, if you keep it toward the lower end of the range, it's probably a safe bet given where we're trading at today.

Chad Vanacore -- Stifel Nicolaus -- Analyst

Thanks, Bill. So, thinking about your pipeline, we had discussions about the transaction market maybe in 2018 not looking as attractive to you. What's making 2019 look more attractive?

Mark Lamb -- Chief Investment Officer

This is Mark. The answer to that first question is yeah, it's predominately SNFs. In terms of 2019, I don't know that I have a specific answer. As I look at the pipeline, I think it's made up of current assets that are just not strategic to specific operators. So, they want to go ahead and get rid of those assets, whether they're not geographically in the footprint or for whatever reason, they just don't make sense for that specific operator anymore. Then there are other assets where you have the operator that just wants to exit for whatever reason.

So, I don't know that we are seeing a particular pattern so far in 2019. I can tell you we've seen an uptick in total transactions from late in the year. We're seeing a lot of deal flow. We're seeing probably a little more on the assisted living and senior housing side than the skilled nursing space right now. I don't know there's a specific pattern so far as to why deal flow has picked up, but we are seeing it in the numbers.

Chad Vanacore -- Stifel Nicolaus -- Analyst

You mentioned seeing some exiting operators. Is anyone coming to you saying, "PDPM is coming up later in the year. We have to make some investments to take advantage of that. Maybe we don't particularly want to make that investment, so let's punt this out to another operator?"

Mark Lamb -- Chief Investment Officer

We're seeing mom and pops that are still looking to sell. Nobody has specifically said, "Hey, PDPM is coming and we just want to monetize. I think the broker community has done a good job of letting those mom and pops know what the investment is going to be in PDPM to be successful. I think that has some variant. I don't think we've seen mom and pops saying, "We're heading for the hills.

We don't to go through another change. Maybe there's a small fraction of thinking about PDPM and the changes helps them to get off the sideline, but at the end of the day, you have mom and pops looking at relatively low cap rates and can monetize their assets today in certain states for good numbers on a price per bed basis.

Chad Vanacore -- Stifel Nicolaus -- Analyst

One more question for me -- this is probably better answered by Greg. What kind of considerations have you given to increasing the dividend just given the pretty low payout ratio and then how do you measure that versus reinvestment and get acquisitions?

Greg Stapley -- Chairman and Chief Executive Officer

Sure. If you look back historically at our dividend pattern, every year, we have raised that dividend and it typically gets raised in the first quarter of the year. So, I would anticipate a dividend increase coming by the next quarter. But we've always looked to keep that dividend at the low end of the peer group in terms of a payout ratio and our investors have been very supportive of our philosophy of plowing as much of that back into the company by way of returning to earnings as we can each year. It's served us well.

Bill Wagner -- Chief Financial Officer

Chad, when you think about the dividend growth, we first start with taxable income. So, as our GAAP income increases every year with investments, we have to raise the dividend just to clear the taxable income.

Operator

Thank you. Our next question comes from Michael Carroll of RBC Capital Markets. Your line is open.

Michael Carroll -- RBC Capital Markets -- Analyst

Thanks. Greg, was that portfolio that you announced, what is the bigger stumbling block that you have to get through? Is it that you have to complete your due diligence or do you have to wait for the seller to officially take control of those facilities?

Greg Stapley -- Chairman and Chief Executive Officer

Diligence is largely completed. We actually got some good news on that this morning. But there's lots and lots of decision makers involved in various steps of the process and it's a little like herding cats. We don't have the width on this one. So, we are doing our best to keep up with it and to see that it gets down to its intended and logical conclusion, but it is not a simple transaction by any means.

Any time you get that many parties in a deal, the difficulty of getting it done goes up exponentially and that's where we're at. But we're used to complex deals, we closed some deals that were similar, probably not as difficult, but similar in terms of their size, number of parties, the complexity at the end of 2017 and we're cautiously optimistic that we could do it again.

Michael Carroll -- RBC Capital Markets -- Analyst

I know these are pretty good assets in good markets, but would you consider this a transition portfolio, since you're switching the operators or how difficult will that be.

Greg Stapley -- Chairman and Chief Executive Officer

I would say that part of the portfolio, a small part of the portfolio is transition, but a large part of it, it's pretty stable. There's still some upside in all of it. But we feel very good about the assets and what we're paying for them and we feel good about the operators we're bring in to run them.

Michael Carroll -- RBC Capital Markets -- Analyst

Then Mark, related to valuations, how have you seen cap rates for product overall? Have you seen them ticking a little bit lower given the more attractive market and then maybe PDPM coming in toward the end of the year?

Mark Lamb -- Chief Investment Officer

I don't think so. I think you still have markets and states like California, Virginia, Maryland, even on a cap rate basis are still where they were two or three years ago, so very attractive states are maintaining. I think maybe some of the secondary states where you have lower barriers to entry, most of those states are most of the deals we're seeing in the states are maybe not cash flowing and are trading at a price per bed.

I think in general, maybe the notion is that cap rates are moving up. I would say that's probably the case in some of the secondary and tertiary markets in states, but in the primary markets, good cashflow means skilled nursing assets are still trading at historical norms over what we've seen the last two or three years.

Michael Carroll -- RBC Capital Markets -- Analyst

Great. Thank you.

Operator

Our next question comes from John Kim of BMO Capital Markets. Your line is open.

John Kim -- BMO Capital Markets -- Managing Director

Thank you. On the $211 million portfolio acquisition, how did you come up with the 12 assets? Did you cherry-pick them from a larger portfolio or were these three assets the seller marketed for sale specifically?

Greg Stapley -- Chairman and Chief Executive Officer

Yeah, John. It's Greg. I'll let Mark weigh in on this too. For lack of a better term, we did cherry-pick it to a certain degree. It doesn't mean every asset is a high flyer or perfect. Like I said, there's still some upside left across the portfolio, but the good news is operators were bringing in to run these are all experienced operators who are in those markets, who know those markets extremely well and who see the remaining upside in what are arguably stabilized or pretty close to stabilized assets are we're pretty optimistic about the future of that investment.

John Kim -- BMO Capital Markets -- Managing Director

You mentioned one of the new operators will be an existing relationship. Can we assume that's Ensign or PMG who are already in the market with you?

Greg Stapley -- Chairman and Chief Executive Officer

Yeah. We're not ready to discuss that yet.

John Kim -- BMO Capital Markets -- Managing Director

Okay. Then the 12 separate special purpose entities, I'm curious, is that typical for a portfolio acquisition the way that you structured the acquisition?

Mark Lamb -- Chief Investment Officer

Yeah, John. This is Mark. It's really just a function of this structure. We're purchasing the membership interests in the entities from the buyer. It's not uncommon. Historically, we've done this maybe once or twice, but it's just a function of this transaction.

John Kim -- BMO Capital Markets -- Managing Director

I'm not sure if I missed this earlier, but on their acquisition pipeline or opportunities that you're looking at, can you just discuss what you're seeing in senior housing?

Mark Lamb -- Chief Investment Officer

Yeah. Senior housing is really kind of a mixed bag. There's everything from non-stabilized, barely cash flowing primary, secondary, tertiary markets to stabilize. So, we're certainly tracking and underwriting these types of deals, but senior housing right now seems to be a mixed bag. Now, granted we're not seeing everything and we're probably seeing mainly tertiary and secondary markets, which we've historically acquired in, but it's really a mixed bag and there's a decent amount of deal flow on the market for those property types in those markets.

John Kim -- BMO Capital Markets -- Managing Director

Is there a preference you have in senior housing in terms of value add or higher growth, something a little bit more stable?

Mark Lamb -- Chief Investment Officer

I think our presence is stable. Maybe if you can do some value add by way of investing some CapEx in. But as you know, turning a senior housing asset is a lot different than turning a SNF asset. You can turn a SNF asset possibly in three to six months. Turning a senior housing asset can take years. That's not really a space that we want to play in.

We're a lot more comfortable seeing a skilled nursing facility that has some immediate upside via changes in the cost structure. We'll take a little bit of a risk from that perspective, but on the senior housing side, it's a long tough slog to fully get a building nursed back to health. I would say that stabilized would be our preference.

Operator

Thank you. Our next question comes from Todd Stender of Wells Fargo. Your line is open.

Todd Stender -- Wells Fargo -- Analyst

Just looking at the Covenant Care transaction, where are the new properties in California in relation to the existing ones and what coverage were they written at and what were the existing ones covering at?

Mark Lamb -- Chief Investment Officer

So, the property locations are one in Northern California and three in Southern California. When you blend the entire portfolio of all eight buildings, I believe the coverage is up in the 1.4 to 1.5 times range, but well covering assets on a blended basis with the one master lease across the eight assets. It's doing well.

Todd Stender -- Wells Fargo -- Analyst

And the new ones -- this is a sale lease back. So, Covenant Care was selling assets?

Mark Lamb -- Chief Investment Officer

That's correct.

Todd Stender -- Wells Fargo -- Analyst

It looks like the mortgage you provided Covenant Care is securing a few assets in Illinois. Can you provide the terms on this? Where I eventually want to go with the question is as they potentially monetize more assets, is this going to be your standard issue short-term mortgage or can this convert to simple interest as they look at tax-advantaged methods to unload more real estate?

Greg Stapley -- Chairman and Chief Executive Officer

Yeah, Todd. This is Greg. That piece of the transaction was a little unusual for us. They were trying to sort out their capital stack. It made sense for us to give them a small mortgage on five assets at a 9% rate in the very short-term. We don't anticipate these assets converting to our ownership, nor do we anticipate those assets staying with Covenant Care for a very long time.

Todd Stender -- Wells Fargo -- Analyst

Okay. So, they could come to market and at that point, maybe you look at them?

Greg Stapley -- Chairman and Chief Executive Officer

We have looked at them and we're happy to lend on them, but we don't see them as acquisition opportunities. We have an Illinois operator we like a lot, but I think five more buildings for him in the near-term would be more than we want him to take on.

Operator

Thank you. Again, if you would like to ask a question, please press * then 1 on your touchstone telephone. One moment, please. Our next question comes from Daniel Bernstein of Capital One. Your line is open.

Daniel Bernstein -- Capital One -- Analyst

This might be a little bit more hypothetical, but with PDPM coming in and maybe margins moving up on rehab, are you talking to any operators looking to bring rehab back in house? If it doesn't improve lease coverage, does it improve your fixed charge coverage, corporate coverage, and guarantees with your operators and how you're thinking about that in terms of future underwriting?

Dave Sedgwick -- Chief Operating Officer

Hey, Daniel. This is Dave. We are talking to our operators about that. There's a lot of discussion they're having internally with their rehab providers to see which format makes sense. Several of them are planning on going in house with rehab. If they're not, they're in active discussions with their therapy providers to come up with a different arrangement to pay for those therapists as they are now not so much a profit center but a cost center. That's in motion right now and I think it will see different ways to skin that cat as the months progress.

Daniel Bernstein -- Capital One -- Analyst

Do you think it might be something that could improve the corporate coverage support for your leases on a longer-term basis?

Dave Sedgwick -- Chief Operating Officer

We do. It's really difficult to quantify that yet. All the operators are going to treat it a little bit differently in terms of what kind of reduction to their therapy cost they'll experience. So, all we can say right now is that common sense says that it will improve margins, but it's just too difficult to quantify that at this stage.

Daniel Bernstein -- Capital One -- Analyst

In terms of your pipeline, the number we gave out has a large portfolio in there. The rest of it, is that mainly acquisitions or are you thinking about funding more mortgages or development. I'm trying to understand the concept of acquisitions versus something else?

Greg Stapley -- Chairman and Chief Executive Officer

Yeah, Dan. This is Greg. Funding mortgages is not something we normally go out and look for. We've done it a couple times to facilitate acquisitions. We have a mortgage with Providence up here in San Bernardino and then we have these mortgages in Illinois with Covenant Care. Both of those mortgages were short-term mortgages that facilitated a larger transaction. In terms of development, we currently have the two development projects that have now been completed and are in lease up in Idaho with Cascadia Healthcare. They're doing super well.

We're really excited about them. We could look to do more development on a very, very limited basis down the road if it makes sense. It's really hard to get new development to pencil when you compare it to simply buying and improving existing nursing home stock. But occasionally, you can find that sweet spot and we have done that in the Boise area.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the conference back to Greg Stapley for any closing remarks.

Greg Stapley -- Chairman and Chief Executive Officer

Thanks, Valerie. Thank you, everybody for being on the call. Obviously, we appreciate your support. If any of you have any additional questions, we are here and ready to answer for anyone and everyone. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.

Duration: 49 minutes

Call participants:

Lauren Beale -- Controller

Greg Stapley -- Chairman and Chief Executive Officer

Bill Wagner -- Chief Financial Officer

Mark Lamb -- Chief Investment Officer

Dave Sedgwick -- Chief Operating Officer

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Jonathan Hughes -- Raymond James -- Analyst

Chad Vanacore -- Stifel Nicolaus -- Analyst

Michael Carroll -- RBC Capital Markets -- Analyst

John Kim -- BMO Capital Markets -- Managing Director

Todd Stender -- Wells Fargo -- Analyst

Daniel Bernstein -- Capital One -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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Why losing a job in your 50s is so devastating

I don't know why my father insisted that a book about career change was a good idea for a 20-year-old college junior, but nonetheless I found myself reading Who Moved My Cheese? in the fall of 1998.

The wildly popular book is an allegory about two mice who try to deal with immense change, which unkindly arrives in their lives without an invitation. 

I remember the book well and filed away its lessons. But at the time I was reading it, it didn't apply to my career, which hadn't even begun. 

But now? Oh boy does it. As a professional financial problem solver, I'm a cheese guide. 

The 1980s were an important point of transition for Americans' retirement strategies. We went from a system primarily built on defined benefit plans (pensions) to a system reliant on defined contribution plans (401(k)s). In its essence, the transition shifted the onus from employers to employees. Now, a person needs to wisely use their 45 years in the workforce to build their retirement strategy brick by brick. It's a lovely yet difficult process.

Is your job safe? Can the middle-class revival under Trump last?

Amazon and jobs:Could the company pick another HQ2 site after ditching NYC?

Even though 2018 was in many respects a a strong year for the economy, job cut announcements were up 28 percent compared with 2017. According to a January release by executive outplacement firm Challenger, Gray and Christmas, U.S.-based companies announced plans to cut 538,659 workers, the most since 2015. (Photo11: yacobchuk / iStock)

That is until your expected 45 years worth of building materials turns into 35 years worth of building materials. 

Losing a job in your 50s is a devastating moment, especially if the job is connected to a long career ripe with upward mobility. As a frequent observer of this phenomenon, it's as scary and troublesome as unchecked credit card debt or an expensive chronic health condition. This is one of the many reasons why I believe our 50s can be the most challenging decade of our lives. 

Assuming you can clear the mental challenges, the financial and administrative obstacles can leave you feeling like a Rube Goldberg machine. 

Income, health insurance, life insurance, disability insurance, bills, expenses, short-term savings and retirement savings are all immediately important in the face of a job loss. Never mind your Parent PLUS loans, financially-dependent aging parents, and boomerang children (adult kids who live at home), which might all be lurking as well. 

Tax update:Refunds are smaller by an average of $186 after second week of filing season 

When does your income stop?

From the shocking moment a person learns their job is no longer their job, the word "triage" must flash in bright lights like an obnoxiously large sign in Times Square. This is more challenging than you might think. Like a pickpocket bumping into you right before he grabs your wallet, the distraction is the problem that takes your focus away from the real problem. 

This is hard to do because of the emotion that arrives with the dirty deed. The mind immediately begins to race to sources of money and relief. And unfortunately that relief is often found in the wrong place. 

The first thing you should do is identify the exact day your job income stops arriving. That's how much time you have to defuse the bomb. Your fuse may come in the form of a severance package, or work you've performed but have't been paid for yet. 

When do benefits kick in?

Next, and by next I mean five minutes later, explore your eligibility for unemployment benefits, and then file for them if you're able. However, in some states severance pay affects your immediate eligibility for unemployment benefits. In other words, you can't file for unemployment until your severance payments go away. 

Assuming you can't just retire at this moment, which you likely can't, you must secure fresh employment income quickly. But quickly is relative to the length of your fuse. I've witnessed way too many people miscalculate the length and importance of their fuse. If you're able to get back to work quickly, the initial job loss plus severance ends up enhancing your financial life. If you take too much time, by your choice or that of the cosmos, boom. 

The next move is much more hands-on, and must also be performed the day you find yourself without a job. 

What nonessentials do I cut?

Grab your bank statement, a marker, and a calculator. As much as you want to pretend its business as usual, you shouldn't. Identify expenses that don't make sense if you don't have a job. Circle them. Add them up. Resolve to eliminate them for the time being, and possibly permanently. While this won't necessarily lengthen your fuse, it could lessen the severity of a potential boom. 

The idea of diving into your spending habits on the day you lose your job is no fun. But when else will you have such a powerful reason to do so? You won't. It's better than dipping into your assets to fund your current lifestyle. And that's where we'll pick it up the next time. 

We've covered day one. In my next column we will tackle day two and beyond. 

Peter Dunn is an author, speaker and radio host, and he has a free podcast: "Million Dollar Plan." Have a question for Pete the Planner? Email him at AskPete@petetheplanner.com. The views and opinions expressed in this column are the author's and do not necessarily reflect those of USA TODAY.

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A look at a few of the claims The Associated Press fact-checked in President Trump's State of the Union address. (Feb. 6) AP

 

Want milk with your chicken and waffles cereal?

Your eyes are not deceiving you. You soon will be able to buy chicken-and-waffles and maple-bacon-doughnut-flavored cereals.

Fans of the two classic combos have Post Consumer Brands to thank. 

The new varieties of Honey Bunches of Oats, officially called Chicken & Waffles and Maple Bacon Donuts, will debut on March 7, also known as National Cereal Day.

Both limited-edition flavors are $2.98 per box, according to Post.

"Sweet and savory unite in two flavor intense cereals that combine chicken and waffle and maple bacon donut flavored goodness for a unique breakfast experience," the company said in an e-mail.

The Chicken & Waffles and Maple Bacon Donuts cereals each have 110 calories, 0.5 gram of fat and 9 grams of sugar in each three-quarter-cup serving.

Chicken & Waffles Honey Bunches of Oats. (Photo: Post)

Attention, Peeps fans:  Your dreams have come true. There's now Peeps cereal

Say cheers to breakfast: Kellogg's Corn Flakes leftovers to be turned into craft beer

Both flavors are hot right now.

KFC jumped on the chicken and waffles bandwagon when it sold the popular pairing for a limited time in November and December.

And bacon has become a fast-food hit recently, thanks to offerings like the McDonald's Cheesy Bacon Fries, Big Mac Bacon burger and the Quarter Pounder Bacon burger; the Wendy's Baconator cheeseburger and Baconator Fries; the Burger King Cheesy Bacon Crispy Chicken Sandwich; the Dunkin' Brown Sugar Chipotle Bacon Breakfast Sandwich; and the Sonic Steakhouse Bacon Cheeseburger.

Whole Foods roses:  Again the best online prices for Valentine's Day

Ka-ching: Here's what an average Valentine's Day cost from 1948 to now

Maple Bacon Donuts Honey Bunches of Oats. (Photo: Post)

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Growing research is pointing to processed meats as relating to an increased risk of cancer. Veuer's Tony Spitz has the details. Buzz60

Follow USA TODAY reporter Zlati Meyer on Twitter: @ZlatiMeyer

Tesla Stock Upgraded: What You Need to Know

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Monday is starting to look like a great day to own Tesla (NASDAQ:TSLA) stock -- and you can thank Canaccord Genuity for that.

This morning, the Canadian investment banker upgraded shares of Elon Musk's electric car company from hold to buy and assigned a $450 price target, implying 44% upside from today's prices.

Here's why.

This upgrade is about the Model 3 -- but not just about the Model 3. Image source: Tesla.

Upgrading Tesla stock

Canaccord Genuity cites several reasons for why it likes Tesla -- ranging from its hope that putting Larry Ellison and Kathleen Wilson-Thompson on Tesla's board will help keep Musk from making any more unwise moves, to optimism about the future for Tesla's Model 3 electric sedan (now officially the best-selling premium vehicle in America).

Tesla reported earning $140 million in profit on $7.2 billion in sales in Q4 2018. That wasn't nearly as great a profit margin as the company achieved in Q3, but it marked the first time Tesla had put together back-to-back GAAP-profitable quarters. What's more, it actually generated more real free cash flow in Q4 than it did in Q3, and more free cash flow than reported profit to boot -- $880 million in Q4, versus $830 million generated in Q3 2018, according to data from S&P Global Market Intelligence.

These back-to-back profitable (and cash-profitable) quarters should allay investor concerns about Tesla's ability to profit from the Model 3 going forward, argues Canaccord in a note covered on StreetInsider.com (subscription required). And its production of roughly 150,000 Model 3s in 2018 should reassure investors about the company's ability to produce the car at scale.

Caveats and quibbles

Granted, not everyone is as enthusiastic about Tesla as is Canaccord Genuity. In June of last year, the company was forced to lay off 9% of its workforce in a move Musk said was designed "to reduce costs and become profitable."

It worked. But last month, Tesla announced further fat-trimming -- 7% of the workforce -- and media outfits are beginning to report that these layoffs directly targeted Tesla's car-delivery operations in the U.S. If true, this would both imply that orders for Model 3 sedans are waning, and also potentially slow down sales by making it a little bit harder for cars to reach buyers.

That's not the way Canaccord sees it, however. Instead, the analyst highlights Tesla's workforce reductions as necessary cost-cutting, directly related to Musk's goal of being able to sell people a mass-market Model 3 for $35,000 before incentives. Assuming he succeeds in this goal, and combined with the potential for strong sales to Europe and China, Canaccord believes the company will not only score a "tiny profit" in Q1 2019, but grow that profit steadily throughout the year.

The big reveal

Potentially the most important point Canaccord Genuity makes today, however, is its prediction that not electric cars per se, but the autonomous driving software that guides them, will be the defining technology in ground transportation in the future. While many companies are testing autonomous driving software and self-driving cars, Canaccord Genuity believes that Tesla's Autopilot has pole position in this race, and indeed holds "an almost insurmountable lead" over its competitors.

What it means to investors

Granted, "It's tough to make predictions, especially about the future." But consider:

Tesla already has not one, not two, but three electric car battery Gigafactories in various stages of construction, and plans to build even more -- while no other car company has built even one. If Canaccord is right about the company winning an "insurmountable lead" in autonomous driving software as well, then it could now have a lock on arguably the two most important technologies that go into making self-driving electric cars: The software that runs them, and the batteries they run on.

Now, Tesla appears to be succeeding in dominating these two technologies at the very moment when car companies around the world are committing to build electric cars at scale. Coincidentally, this morning also saw Morgan Stanley publish a report warning that Tesla will soon face "serious competition" as other manufacturers begin bringing electric cars to market en masse, which could put a crimp in its ability to remain profitable in the car-making business.

But what if, rather than worry about production rates, delivery schedules, and competing with other manufacturers for electric car market share, Tesla instead evolves into a go-to supplier of electric car technologies -- simply sitting back and selling or licensing these crucial components to other manufacturers?

I'd argue that if that's the way things go in the future, even Tesla's current share price might not be too much to pay for what it one day may be worth.

Restaurant Brands International Earnings: QSR Reports Q4 EPS Beat

The Restaurant Brands International earnings report for the fourth quarter of 2018 has beating some estimates.

Source: Ian Rutherford via Flickr (modified)

Restaurant Brands International (NYSE:QSR) reported earnings per share of 68 cents for the fourth quarter of the year. This is a decrease from the company’s earnings per share of 71 cents from the same time last year. However, it still gives QSR stock a slight boost today by coming in above Wall Street’s earnings per share estimate of 67 cents for the quarter.

Net income reported in the Restaurant Brands International earnings release for the fourth quarter of 2018 was $301 million. This is a drop from the company’s net income of $578 million reported in the same period of the year prior.

The Restaurant Brands International earnings report for the fourth quarter of the year also includes operating income of $516 million. The fast food company’s operating income from the fourth quarter of 2017 was $505 million.

Restaurant Brands International earnings release for the fourth quarter of 2018 also has revenue coming in at $1.39 billion. This is better than the company’s revenue of $1.23 billion from the fourth quarter of the previous year. It also matches analysts’ revenue estimate for the period.

The most recent earnings report from Restaurant Brands International also has it announcing a dividend of 50 cents for the first quarter of 2019. The company also says that it is targeting $2.00 in dividends for 2019.

QSR stock was up slightly as of noon Monday.

As of this writing, William White did not hold a position in any of the aforementioned securities.

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Why Mattel Stock Surged Today

What happened

Shares of Mattel (NASDAQ:MAT) were flying higher today after the struggling toy maker topped expectations in its fourth-quarter earnings report. In an industry that's been hammered by the Toys R Us bankruptcy and kids' increasing preference for screens over classic toys, Mattel jumped over low expectations and also seemed to outperform rival Hasbro (NASDAQ:HAS). Solid growth from the Barbie brand also impressed investors and as a result, the stock was up 22.5% as of 12:28 p.m. EST.

So what 

Mattel said sales in the key holiday quarter slipped 6%, or 3% in constant currency, which reflected an 8% impact from the Toys R Us liquidation. Revenue came in at $1.52 billion, which topped analysts' estimates of $1.44 billion.

Image source: Mattel.

Two of Mattel's "power brands" showed strength as Barbie gross sales increased 12% and Hot Wheels saw 9% growth. However, Fisher-Price and Thomas & Friends, and American Girl saw sales plummet by 13% and 28%, respectively.  

The toy maker also said gross margin improved for the first time in the fourth quarter in years as adjusted gross margin soared from 30.7% in the prior-year quarter to 46.6% due to cost-savings initiatives and lower inventory obsolescence costs. Adjusted operating income was $113 million, up from -$163 million in the quarter before, and the company posted adjusted earnings per share of $0.04, up from -$0.82 in the quarter a year ago. That beat expectations of -$0.18. 

CEO Ynon Kreiz sounded optimistic about the company's progress, saying, "Our fourth quarter results demonstrate meaningful progress in executing our strategy and significant improvement over last year. We remain focused on advancing our strategy to restore profitability and regain top-line growth in the short-to-mid-term and are laying the groundwork to capture the full value of our intellectual property in the mid-to-long-term." 

Now what 

Mattel is clearly making progress in its turnaround bid, which explains the cheers from Wall Street today. Management said it would give 2019 guidance at the annual Toy Fair in New York next week, which is likely to move the stock one way or another.

The company is certainly moving in the right direction, but with sales falling and only minimal adjusted profit in its biggest quarter, there is still a lot of work to be done to restore the company to full health.