CareTrust REIT - Earnings Call - Q1 2021

Transcript

Speaker 0

Welcome to the CareTrust REIT first quarter twenty twenty one earnings call. Participants should be aware that this call is being recorded, and listeners are advised that any forward looking statements made on today's call are based on the management's current expectations, assumptions, and beliefs about CareTrust'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, and may or may not reference other matters affecting the company's business or the businesses of its tenants, including factors that are beyond their control such as natural disasters, pandemics such as COVID nineteen, and governmental actions. The company's statements today and its business generally are subject to risk and uncertainties that could cause actual results to materially differ from those expressed or implied herein. Listeners should not place undue reliance on forward looking statements and are encouraged to review CareTrust's SEC filings for more for a more complete discussion of factors that could impact results as well as any financial or other statistical information required by the SEC Regulation G.

Except as required by law, CareTrust REIT and its affiliates do not undertake to publicly update or revise any forward looking statements where changes arise as a result of new information, future events, changing circumstances, or for any other reason. During the call, the company will reference non GAAP metrics such as EBITDA, FFO, and FAD, or Fed. And normalized EBITDA, FFO, and FAD, when viewed together with GAAP results. The company believes these measures can provide a more complete understanding of its business, but cautions that they should not be relied upon to the execution of GAAP GAAP reports. Yesterday, CareTrust filed its Form 10 q, 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. On the call this morning, Bill Wagner, chief financial officer, Dave Sedgwick, president and chief operating officer, Mark Lamb, chief investment officer, and Eric Gillis, vice president of portfolio management and investments. I will now turn the call over to Greg Stapley, CareTrust's REIT Chairman and CEO.

Speaker 1

Thanks Alexander and good morning everyone. We're pleased to be able to tell you that CareTrust outstanding operators have proven remarkably stable overall thus far in this pandemic. Most of them have virtually confronted the hard task of adapting to the new realities of COVID's changed operating environments and those that have are faring well. But how long it will take for occupancy and normal hospital discharge patterns to resume is still unknown. So as vaccination rates rise and parts of the country begin to emerge from lockdowns, it's important to remember that the pandemic's effect on the skilled nursing and seniors housing industries are far from over.

For our part, throughout the past year we've worked hard to stay close to our tenants, collect all of our rents, pursue good acquisition opportunities, and carefully guard our balance sheet. Thankfully, having partnered with great operators in the first place, we have thus far been able to avoid some of the problems that beset others. The challenges remain on the horizon and we will continue to be vigilant. We are pleased to report that we collected 100% of contract rents in the first quarter. We also collected 100% in April and we appear to be on track to collect 100% in May.

So in spite of the continuing headwinds and in light of the continuing government support, we remain cautiously optimistic about our tenants prospects as occupancy begins to climb back. You saw this yesterday when we increased our 2021 guidance to reflect the recent acquisitions. To be sure, the government support has been critical. But if you look at Page six of our supplemental published yesterday, you will see that we've again given you our operators EBITDAR and EBITDARM lease coverages both with and without CARES Act funding. Most of our skilled nursing and multi service campus tenants who account for about 86% of our rental revenue are performing near to or better than their 2019 coverage metrics without the CARES funding.

Granted, these particular operators are among the upper outliers in the industry, and many, in fact most other providers out there still need that government support. We continue to hope that the government will see the obvious value in such things extending the waiver of the three day qualifying stay well beyond 2021, and that additional relief funding will come soon and in sufficient quantity to help those who need it to achieve the soft landing that the post acute healthcare system and its predominantly elderly beneficiaries still need. For our part, with low leverage, great operator relationships, plenty of liquidity, and a great team here, CareTrust remains well positioned to continue growing and pursuing our mission of pairing great operators with meaningful opportunities to transform individual facilities and by extension the industry as a whole for the better. So with that, I'll turn it over to Dave for some more color on what's happening out there. Then Mark will jump in with recent acquisitions in the pipeline and Bill will finish off the financials.

Then we'll open for Q and A. Dave?

Speaker 2

Great, thanks Greg and good morning everybody. In Q1, our skilled nursing operators reported a much anticipated bottoming in skilled nursing occupancy. In January we hit a pandemic era low but at the end of Q1 our SNFs reported a moderate recovery of two twenty bps. On the skilled mix front, the question has revolved around the rate of return to the pre pandemic levels there as well, now that COVID cases in the nursing homes have materially declined. At quarter end our operators were still about four forty bps above the pre pandemic skilled mix norm.

For seniors housing occupancy and speaking relatively to what we've observed in the broader sector, we're pleased to highlight how resilient our seniors housing operators have been so far. COVID hit them hardest at the end of last year and at the start of this year. As a skilled nursing seniors housing occupancy appears to have hit bottom and thus far has held steady. I wish we could predict the slope of recovery, but at this point it's just too early to speculate. Our thesis is that we will return to pre pandemic occupancy and coverage.

The question of timing will remain unresolved for some time. Noting again that portfolio wide or national commentary is only marginally relevant. Since these businesses are hyper local and extremely sensitive to the quality of the operators running them. Needless to say, we expect the rebound in occupancy to pre pandemic levels to be asynchronous across the portfolio. Next let me talk about our lease coverage.

As Greg noted, you've seen yesterday's supplemental a continuation of our enhanced COVID era disclosure wherein we try to be as transparent and helpful as possible by reporting lease coverage on an EBITDAR and EBITDARM basis both excluding CARES Act funding and including the CARES Act funds received to date and amortizing them through June. Stripping out the CARES Act funds we saw overall portfolio coverage hold steady ticking up four bps to 2.12 times. As we evaluate the length of their runway for those operators who have needed these funds, funds. We remain constructive about the time that they have to climb their way back through this year and into next. Lastly and on a related note, there remains roughly 24,000,000,000 in undistributed CARES Act funds.

The transition to the new administration has slowed down the processing of those funds but we understand progress is now being made. Additionally, 8,500,000,000.0 has been allocated for rural providers and based on preliminary reports approximately 154 of our facilities would qualify. With that I'll pass the call over to Mark to talk about investments. Mark?

Speaker 3

Thanks Dave and hello everyone. As Greg and Dave have reminded us, the pandemic remains at the forefront of everyone's mind right now, including potential buyers and sellers. We've not just been playing defense however, we still feel that we have a mandate to grow and we carefully preserved our liquidity and stayed active in the marketplace. Thanks to Joe, Josh, James and the entire team here at CareTrust. We started off 2021 by adding over 150,000,000 very nice assets to the portfolio so far.

As most of you know, in March, we closed out a very nice 4,000,000,000 CCRC portfolio for a 126,100,000.0. The portfolio is located in extremely strong Southern California submarkets and represents some of the best real estate we have purchased since our start seven years ago. More importantly, we feel like we have matched the right operators with these assets with both Bay Shire Senior Living and Aspen Skilled Healthcare stepping in. A few days later we purchased 145 bed SNF in Santa Barbara for $15,800,000 with a lease in place with Covenant Care. Earlier this week we announced a tack on acquisition with Bay Shire Senior Living as we acquired a 123 bed sniff here in Southern California from a COVID weary single asset owner who is ready to retire.

That building sits in a market that enjoys little competition, a deep labor pool, and a staff that is eager for fresh leadership and a commitment to quality patient care. We were very pleased that Bayshard sourced and brought that deal to us. So as we sit here today, we have invested $151,700,000 so far this year and we look forward to seeing what the next few quarters look like in terms of actionable opportunities. We are pleased to note that deal flow has picked up in recent weeks. The volume of current opportunities seems to be tilted towards the seniors housing space.

We are cautiously optimistic that we will see more and more SNF opportunities as mom and pop operators head for the exits and larger operators pair down their portfolios coming out of COVID. In speaking with the brokerage community, we expect the deal flow will continue to increase over the coming quarters as operator fundamentals hopefully trend back toward pre pandemic levels. As we sit here today, our pipe has been reloaded back to our historical range of a 125 to a 150,000,000. Its composition is primarily singles and doubles, but as usual, we're also investigating a couple larger portfolios that look intriguing. Of the deals on the pipeline, each one is earmarked for our existing operator bench, which makes them easy to tack on and provides greater certainty for sellers.

The active pipe is predominantly SNFs with a few seniors housing assets that we feel are great fits for our operators in that space. Please remember that when we quote our pipe, we only quote deals we are actively pursuing under our current underwriting standards and that only if we have a reasonable level of confidence that we can lock them up and close them in the relatively near term. Now I'll turn it over to Bill to discuss the financials.

Speaker 4

Thanks, Mark. For the quarter, normalized FFO grew by 5.5 over the prior year quarter to $34,100,000 or $0.36 per share. And normalized FAD grew by 7.4% to $36,100,000 or $0.38 per share. During Q1, and as we've done every year, we again raised our dividend, this time by 6%. This increased our payout ratio for the quarter to 74% on FFO and 70% on FAD.

This is consistent with our historical pattern. And as usual, we expect it to come in over the course of the year, as we hopefully continue to grow the portfolio at solid spreads over our weighted average cost of capital. Leverage continues to be at all time lows at a net debt to normalized EBITDA ratio of 3.7 times today. Our net debt to enterprise value was 22.1% as of quarter end, and we achieved a fixed charge coverage ratio of 7.9 times. As Greg mentioned, with the 2021 investments made to date, we are raising our previously released guidance by $06 on both ends of the range to normalized FFO per share of 1.46 to $1.48 and normalized FAD per share of $1.55 to 1.57 This guidance includes all investments and dispositions made to date, a share count of 96,100,000 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 rental revenues for the year, again including only acquisitions made to date, are projected at approximately $184,000,000 which includes less than $60,000 of straight line rent. Three, interest income of approximately 2,000,000. Four, interest expense of approximately 24,300,000.0.

In our calculations, we have assumed a LIBOR rate of 15 bps and a grid based margin rate of 125 bps on the revolver and 150 bps on the unsecured term loan. Interest expense also includes roughly 2,000,000 of amortization of deferred financing fees. And five, we are projecting g and a of approximately 19,000,000 to 20,900,000.0. This range is up approximately 1,500,000.0 over our previously released guidance due to certain hurdles being met relating to our short term incentive compensation program. Our G and A projection also includes roughly 7,000,000 of amortization of stock comp.

Our leverage and our liquidity positions remain strong. Year to date, we have sold approximately 740,000 shares at an average price of $23.66 under our $500,000,000 ATM program that we put up last year for net proceeds of approximately 17,300,000.0. The outstanding balance on our $600,000,000 revolver currently sits at a 170,000,000, and we have approximately 24,000,000 in cash. In addition, as Greg noted, cash collections for the quarter and for April came in at 100% of contractual rent, and May appears to be on track to do the same thing. And with that, I'll turn it back to Greg.

Speaker 1

Thanks, Bill. And thanks, everyone. We hope this discussion has been helpful to you. We appreciate your continued interest and support. And with that, we'll be happy to answer questions.

Alexander?

Speaker 0

Thank you, sir. At this time, I would like to inform everyone, in order to ask a question, We have your first question from Steven Valiquette with Barclays. Your line is open.

Speaker 5

Steve? Hey, sorry guys. I was having a temporary work from home crisis with the apologize. So yes, look, congrats on these strong results. Good to see the guidance increases, and we're studying the coverage ratios across the largest tenants.

Everything looks pretty solid there as far as overall portfolio. Just wanted to hear more about pace of occupancy recovery. It definitely seems like across the industry, what's happening much faster in SNFs overall, certainly versus senior housing. But just I think you mentioned still some choppiness in the SNF occupancy recovery maybe across some operators. Just want to hear more about the volatility on the SNF side that I think you alluded to.

Thanks.

Speaker 2

Yeah, thanks for that question. There's not a whole lot of color to give. We're really early in, really just weeks away in some cases from seeing the bottom depending on the facility and the local market that you're talking about. So I think, I hope that next quarter we'll have some more color to share, a little bit more of a track record and time from what we would call the bottom. But like I said in my prepared remarks you're talking about the skilled nursing sector occupancy it's really difficult to do that even across the whole portfolio much less the whole country.

You really have to look at it operator by operator and some markets within the same state will recover at very different paces. Hopefully we'll have some more color to give you next time.

Speaker 5

Okay. One quick follow-up. I mean, there's so many positive things going on. Hate to focus on a negative. Are there any signs, maybe just in a few geographies here or there, where perhaps home health has taken some share from SNF during the recovery phase and that's maybe causing some of the volatility or is that not really a trend that you're seeing?

Just curious, any high level thoughts around that as well. Thanks.

Speaker 2

Yeah, you bet. Our operators haven't attributed occupancy issues to home health per se. It's been more of a function of how their market has been impacted by COVID and how the hospitals in their markets have been impacted by it. I'm sure that that may have something to do with it but we don't have any real insight from our operators on that front.

Speaker 5

Got it. Okay. All right. Thanks.

Speaker 0

We have your next question from Michael Carroll with RBC Capital Markets. Your line is open.

Speaker 6

Yes. I want

Speaker 7

to talk a little bit about, I guess, your investment activity. And I think, Mark, you answered this last quarter, but can you talk a little bit about how you're underwriting deals today? Are you expecting operations to hit pre COVID levels? Or how big of a safety margin do you require on some of these transactions?

Speaker 3

Yes. So I don't think it's too dissimilar from what we what we said last quarter. I mean, we we you obviously need to understand what the run rate was, you know, kind of pre pandemic, you know, on on you know, from a from a margin perspective, from an occupancy perspective. Then you need to look at twenty twenty numbers to understand on the expense side what what is ballooned. Then, really, it's getting in the weeds with our operators to understand what specifically is not gonna come back down on the expense side.

And then and then, you know, on the on the occupancy front, you know, I don't think anybody is is expecting to get, you know, to get back on overall occupancy. You know, we're certainly not underwriting overall occupancy to get back to pre pandemic levels, you know, for a period of time. So, you know, I I think as we've done historically, we we always look at each asset and look at where the low hanging fruit is, what day one changes can we make. You know, historically, we've we've changed operators. And and and so, you know, we continue to stick to our knitting on on that front and see what

Speaker 4

we can see what we

Speaker 3

can trim on the expense side. But as far as top line and occupancy, you know, it's it's really, you know, understanding those local markets and understanding why, you know, occupancy, you know, should get back to to pre pandemic levels. Is it relationships with the hospital or a physician group in in that particular submarket. But I would say, overall, we're not we're not assuming that if a building historically is run, you know, maybe 90 lower 90, you know, 92% occupancy, we're not assuming that they're gonna get back there in the near term. So what does coverage look like?

What does coverage look like with maybe 80% or 85% occupancy? And what assumption do we make for skilled mix?

Speaker 0

Okay. And then

Speaker 7

what are you seeing on the investment opportunity side from the smaller operators that might want to exit the business? It sounds like you had a few of those in your deal activity that you just recently completed. I mean is this expected to grow? And over time, we think that some of

Speaker 1

the SNF volumes that you're able

Speaker 7

to find is going to, I guess, maybe exceed what you're doing maybe even a few years ago just because there's a bigger opportunity set?

Speaker 3

Yes, that's an interesting question. I mean, there's an awful lot of capital on the sideline waiting you know, to pounce. Mean, I I think today is as competitive on the SNF acquisition front as it's ever been just due to the lack of supply. So I think the first part of your question is, will more and more mom and pops head for head for the head for the hills? Potentially.

You know, do do the larger guys, you know, kind of pare down on assets that strategically don't fit, whether that's, you know, kind of the regional, super regional, or even, you know, the large players with 100 plus buildings. So and we would expect to see deal flow coming from those buckets. But at the same time too, terms of what we will be able to to grab, that would be interesting because there's there's, you know, a lot of competition to to to acquire skilled nursing assets today. And private, very sophisticated buyers, oftentimes with operators and or an operating arm to their to their real estate company, are very nimble and and are, you know, very competitive, you know, with us. And so it'll be interesting to see what, you know, what volumes we'll be able to do over the next couple of years, but I think we'll think we'll have our fair share of of opportunities as as we've seen them over the the past few.

Greg, do have anything to add? No, I

Speaker 1

think that's a great answer.

Speaker 7

Great. And last one for me. I appreciate that. Can you talk about some of the larger transactions that you mentioned in your prepared remarks? I mean what type of deals are these?

How big are they? And it sounds like this is going to be an operator going to be transitioning out.

Speaker 3

Yes. I mean, I really can't comment too much on these opportunities. I mean, they're we're seeing opportunities both on the on the SNF and ALF front or seniors housing front. And and so, you know, they they range in size. You know, we we've always kind of hit on a on a chunky good sized deal if you look back at our historical kind of investment pipeline.

And and so we're always taking a look at the larger the larger transactions that, you know, potentially can can can help us make our year. And and and this year is no different. And so, you know, we're we're we're we're tracking, you know, a couple that are on market, a couple that are that are not on on the market, and and, you know, we'll we'll see what happens. But I I think it's premature for us to to comment on on that at this point.

Speaker 8

Okay. Great. Thanks. I appreciate it.

Speaker 0

We have your next question from Connor Siversky with Berenberg. Your line is open.

Speaker 9

Hey, everybody. Congratulations on the print. I'm just wondering if we could get a little bit more color on maybe a backlog of surgeries for the relevant population and how referral patterns are looking now maybe versus pre pandemic levels? And if there's any sense of how close we are to a normalized basis on any of those metrics?

Speaker 2

Well that's a great question Connor. Unfortunately we don't have a ton of real time intel on what's happening in the hospitals. Get it from being close to our operators and hearing what they're saying in terms of hospital flow. We're paying attention to the public health systems and hospitals and what they're talking about. And in some of those recent earnings calls we took note of some optimism that they're expressing that there is some pent up demand that's coming back.

The elective surgeries are a little bit of I think a misconception since the vast majority of the nursing home patients that are admitted from the hospital actually started their journey through the emergency department, not necessarily conveniently scheduled elective surgery. And to the extent that the nation, or really for us the individual markets are still in some form of lockdown, wearing masks, not going out and living life as normal, there's going to be a little bit of a constraint on people going out and living their lives again which leads to that hospital volume. That's actually precisely what some of the hospital health systems talked about in their remarks recently. And it's something that we've always understood and tried to talk about as well. So the key kind of lead indicator for us is gonna be that, that the restrictions related to COVID entirely are lifted and people get back to their normal lives.

Hard to imagine that our occupancy fully recovers before that happens.

Speaker 9

Thanks, that's very helpful. And I know you guys had mentioned the skilled NICs earlier in the call. I'm just wondering if there's any sense of what it could look like maybe at the end of this year or perhaps the end of twenty twenty two.

Speaker 2

Nope.

Speaker 9

That's fair enough.

Speaker 1

Hey Connor, that's the correct answer but we can probably give you a little more color on that. I think as you know skilled mix has been elevated as our skilled nursing operators have been able to skill people in place due to the waiver of the three day qualifying stay. And because COVID was a qualified patient for skilled. We can still skill in place which is a great thing both for residents and for our operators and for the healthcare system and the payers. COVID is down precipitously thankfully across the portfolio And so we're just not seeing as many opportunities or needs to skill patients.

And so we do expect that skill mix to decline over time, as Dave said in his prepared remarks, to sort of a pre pandemic norm. Question is how fast that will happen and because that skilled mix and some of the extra revenue that comes with it has backfilled some of the revenue lost due to the occupancy drop, Question is what the match is gonna be like between the occupancy recovery and the skilled mix normalization. So we're watching that really, really closely to see what happens and hoping that those elevated skilled revenues will continue to at least mitigate some of the occupancy revenue loss. Does that make sense?

Speaker 9

Yep, yep. Do you think there's any sense that you're getting to the lower bound of length of stay reductions?

Speaker 1

No. I I I don't think I I haven't heard of any pressure on length of stay. I don't know.

Speaker 2

Eric, how about do

Speaker 1

you have a have you seen something on that?

Speaker 8

No. We we we do we do look at length length of stay over time, and and it has it has stayed pretty consistent over the last several months. But it is something we look at, but it's been fairly consistent.

Speaker 0

We have your next question from Todd Stender with Wells Fargo. Your line is open.

Speaker 10

Hi, thanks. Probably for Mark, just to get a sense of your risk appetite right now for both skilled and assisted living deals. Assuming you're losing out on some deals, what do you think the underwriting is out there as far as growth coverage. Is there anything you can share on stuff that maybe you're being conservative on and maybe rightfully so? Any comments on deals maybe that you're losing?

Speaker 3

Yeah. I think, you know, we we always start kind of in and around, you know, 9%, nine and a quarter, you know, on our going in lease yield. As as as we've talked about over the years, we wanna give up a little bit of little bit of yield for coverage. So, you know, just in terms of, you know, losing out, you know, I think I think there are groups that, you know, have the ability, you know, to go, you know, to go into the eights and in some some instances, you know, maybe even the high sevens, the private guys. Because, you know, their spread, you know, over HUD ends up, you know, being, you know, in some cases, you know, four to four to 500 basis points.

So, you know, so I think I think it's it's those groups that are willing to, you know, to shave to kinda go down into the into the high sevens that, you know, that we're we're we're missing out too. So and and they, you know, maybe are are a little little more free in terms of what sort of terms they they need from a transactional perspective going in the door and and, you know, in terms of guarantees and and that sort of thing. So we're, you know, we're, you know, on on you know, sometimes on a on portfolio transactions, we wanna make sure that structurally it's right for us and and it's right for our tenant. And and if it's not, then, you know, we've all obviously, you gotta get the underwriting and the economics right, but you also gotta get you wanna make sure that the transaction structure is right for for both the landlord and the operator.

Speaker 10

Okay. Thanks. And then probably shifting to Bill just for funding the growth, maybe to build off of Mark's comments about the HUD financing with low coupons. Can you speak to your willingness to solely tap the debt markets right now? Certainly, it's pricing and terms remain in favor of borrowers.

You're below your targeted leverage range. Maybe just think thinking through how you can fund deals with pretty low cost unsecured debt right now.

Speaker 4

Yeah. Rates still remain extremely low, and that is an attractive source of financing for us. Depending upon invest you know, investment flow size is going to dictate a lot of how we finance. Right now, as Mark said in his prepared remarks, a lot of the pipe is made up of singles and doubles. And I would just take you back to our ATM, which is just a wonderful tool to match fund those singles and doubles as they come across the finish line to issue some shares under that to finance those and maybe use a little bit of the revolver.

We like where the leverage is. We like it below four. We think it's helped us. So that's how I kind of think our financing is for the next couple of quarters.

Speaker 11

Okay. Thanks a lot.

Speaker 0

We have your next question from Juan Sanabria with BMO Capital Markets. Your line is open.

Speaker 11

Hi. Good morning. Thanks for the time. Just hoping you could talk a little bit about the watch list, any changes? I know things are very fluid, but any color there would be appreciated.

And if you could particularly talk about Noble or Premier seniors housing operators with coverage kind of sub one times, how you feel about those two in particular?

Speaker 2

Yeah, you bet. As far as the watch list goes, I think the comments we've made on that in previous quarters still stands, which is that if an operator was on the watch list before the pandemic they still are. And they have largely been buoyed up by the government funding that has helped them. That is certainly true of those guys. And there's really nothing pressing or new on that front.

We stay very close to them, got great relationships with all of our operators and are encouraged by the liquidity that they do have in place right now and the runway that they have. In terms of Premier and Noble, a little bit of a broken record on them as well. They've weathered the COVID storm that hit really hard at the end of last year and the beginning of this year. Hit their portfolio the hardest in terms of timing. Their occupancy is still relatively strong related to where they started the pandemic at.

And we're seeing them start to claw back and start to climb facility by facility a little bit here and there to get stronger there. So still two good operators, feel really good about them and really fortunate that they've been where they have been during this pandemic.

Speaker 11

Okay. And then just on the reimbursement side or actually I should say just the government support, Any sense of what that rural distribution could mean? You you said that x amount of facilities were were eligible. Do you know how much runway that could provide you guys or or or any other tidbits to help us think about what that could mean as a benefit for CareTrust?

Speaker 8

This is Eric. We work with some consultants that keep us up to date with what's being said and worked on from a perspective of the provider relief funds. We've looked at our facilities, how many would qualify. It's a large percentage of that. We still don't know details on funding and really where they're going to be able to use those funds.

It's anticipated that it will be possibly against their budgeted revenue, which would be nice. But we hope that after the announcement with what's remaining in the $24,000,000,000 of the CARES Act that an announcement will be made after that regarding the rural funds. We stay close to that largely because we know that a lot of our operators and a lot of our facilities will qualify for those funds. And obviously, we believe that it will give them an even more runway to have a soft landing and get that occupancy back up to where it was pre pandemic.

Speaker 11

Thanks. And one last one for me. Any thoughts on the CMS comments on PDPM? And do you think there's a chance we'll see anything this October or more likely that they'll defer and gather more data to have a more fully formed view of how much above revenue neutral it ended up being so far?

Speaker 2

Yeah, think there certainly is a chance. But what we're hearing so far in this open comment period is that there's a lot of comments going back to CMS about how they calculated that number and whether or not they fully captured PDPM's impact on that increase. I think that there's going to be quite a bit of comments for them to deal with there. Based on their conciliatory tone even if they do go forward with it it seems like the most likely implementation of a recalibration would be staged over time. But there's still a lot to be determined on that front regardless of whether it's draconian or phased over time or reduced in terms of that recalibration.

As we've done the math we think our operators are going be just fine, particularly because the operators most at risk in our portfolio that have the highest skilled mix also happen to have the highest coverage.

Speaker 11

Thank you.

Speaker 2

You bet.

Speaker 0

We have your next question from Jordan Sadler with KeyBanc Capital Markets. Your line is open.

Speaker 12

Thank you, and good morning out there.

Speaker 1

So Hi.

Speaker 12

Hi, guys. I wanna follow-up on, first, the pipeline, maybe, Mark. You know, it it sounded, on one hand, that the stuff that's teed up, the one twenty five to one fifty is more weighted towards SNFs with a a mix of some seniors housing here and there. But when I think you talked about sort of the funnel or the flow in the market. It was sort of the other way around.

I think you talked about seniors housing, you know, having a greater waiting. So can can you maybe just clarify for us? Like, what we're seeing what you're seeing front and center in underwriting imminently is more skilled nursing heavy. Is that correct? So

Speaker 3

yeah. Let me let me just clarify. So so what we're seeing in terms of deal flow from the market is more seniors housing. Our pipeline and what we're focused on and and and under, you know, LOI is more sniff heavy. So despite the fact that we're seeing heavier deal flow in the seniors housing side, we're still comfortable on the sniff stuff and continuing to,

Speaker 6

you

Speaker 3

know, see those opportunities. We're just not seeing we're

Speaker 6

just

Speaker 3

not seeing the volumes on the sniff side that we, you know, that we, you know, maybe expected, But we're but we're still seeing those opportunities, and and that's what we're pursuing.

Speaker 12

Okay. And then a follow-up on sort of underwriting. Right? So so the PDPM discussion, that we were just talking about, Juan, is relatively new news, to the extent that you've been, you know, due diligencing, assets that are under LOI. So how is this impacting your underwriting?

What what are you doing?

Speaker 3

Well, you know, I think I think there's a couple things. I think we'd look at you know, we certainly look at the medic the Medicare rate. You've obviously gotta back out, you know, to the extent you can the, you know, the the waiver, the three day qualifying stay to kinda figure out what the what the right run rate is, you know, for, you know, for Medicare. I think there's got to be a little bit of margin of safety on that rate. I think what's often as we look at each individual asset, oftentimes you can look at the specific Medicare rate and each individual operator is going to be able to capture their rate a little bit differently.

So, you know, based on the MDS and based on the diagnoses of each individual resident, we sort of have an understanding of where the benchmark should be, and then we adjust off of that. So, you know, it's it's it's very specific to to the assets and it's and it's in in lockstep with our operators to understand certain certain buildings are gonna get a certain type of of acuity. Not not not all Medicare patients are the same. You're gonna have you know, in in in some communities, you can have patients that come in that are extremely clean, very healthy, that come in for maybe a stroke and they don't have multiple comorbidities, while while other other pockets of markets can have patients that, you know, have a laundry list of diagnoses and they're gonna look very, very different under the MDS, which which is the basically the input information that goes into to billing the Medicare patients. So so really, you know, it's it's getting with our operators and figuring out, you know, kind of based on the building, based on the the flow that they expect to get in terms of skilled patients.

And then really, you know, kind of sharpshooting and dialing in on what that rate Medicare number is. In terms of in terms of kind of right sizing for, you know, the the the step down in in PDPM, you know, we take a look at that and kind of, you know, kind try to try to figure out, you know, what, you know, what that rate looks like if it's been cut by, you know, say, 3% or 5% or 7% just to just to see what that does to coverage to stabilize coverage. But there's other factors too. I mean, what what happens with, you know, with Medicaid? And you have you have states that are looking at, you know, continuing to, you know, to change their Medicaid rates.

You have some states that are going from from from fixed rate to more of a CMI based, you know, acuity. So there there's several things that go into it, but, you know, I think all things being equal, the important factor is getting getting shoulder to shoulder with the operators and and and walking through the assumptions, understanding why, you know, what they're using for their Medicare rate, what they're using for their their Medicaid daily rate. And then, you know, off you know, really looking at what the billing's doing from an existing perspective and making sure that we can bridge making sure the operator can bridge the gap and get to get to where they are projecting.

Speaker 12

Okay. That's helpful. May maybe one quickly for you, Bill. On the ATM, you know, your your leverage going it was three three. Now it's three seven.

You issued 700,000. Clearly, you didn't need the 700,000 shares in order to stay within your tolerance, right, because you're still below four to five. But I I guess you're you're adding a little bit more capacity for yourself. How should we think about, you know, where you wanna be sorta short to medium term vis a vis that four to five target? Like, do you actually wanna be under four?

Speaker 4

We like operating under four.

Speaker 1

Hey, Jordan. It's Craig. I'll I'll just I'll just check on to that and tell you that, you you know, if you look at what we just did, we were running, like, three three, in February, and we just spent a $150,000,000 and didn't break four. We really like that. It's already ratcheting back down to the 3.7 range.

We'll be ready for the next $150,000,000 deal should that come along. This just seems to be a very, very good place for us, for the investors we've spoken with, like it very much. While we're not going to lower our target range of the four to five times so that we could do the $804,000,000 deal if it came along and we do have the capability to do that, we really do intend to stay kind of where we are in the threes.

Speaker 12

Okay. That's helpful. Thank you, guys.

Speaker 0

We have your next question from Daniel Bernstein with Capital One. Your line is open.

Speaker 6

Hi. Thanks for taking the call. I guess I have a question on the CPI bumps. I noticed in your guidance you went from 1.2 to two point zero. So I just want to understand a little bit better about how those CPI bumps are I guess reset within those leases.

Are they reset quarterly? Maybe what they're linked to? Just want to get a better idea of that.

Speaker 4

Sure. Hey, Dan, it's Bill. The CPI bumps occur on annual renewal date. So it's once a year. Some of the leases have caps on on those on the CPI charge and a floor of zero.

For we moved it from one and a quarter to 2% from last quarter's guidance mainly because we're seeing CPI increases north of 2% right now.

Speaker 6

All right. Okay. And then maybe a related question would be if I was an operator and I'm looking at inflation, I might not want a CPI based lease. So have you had any pushback from potential new tenants and deals that you're looking at and that people maybe want more of a fixed bump than a CPI bump?

Speaker 1

Dan it's Greg. No we really haven't. Most of our operators really like CPI as opposed to fixed months because they feel like it tracks better with their overall expenses, labor costs and everything else out there. And it just seems to be while you can't predict an exact number, it just seems to be more predictable in terms of the economy and how their businesses fare. So we don't get a lot of pushback on CPI bombs as long as we can give them a range that it won't go over.

And as Bill said, most of them are capped somewhere between for the Ensign leases which were kind of semi arm's length leases, They're capped at two and a half. Other leases are capped at three and a half. As long as they've got the cap on there and they can just go with the economy there, that's what they like, actually.

Speaker 6

Okay. Okay. That that's all I had. Appreciate the time, guys. You bet.

Thank you.

Speaker 0

Thank you, Dan.

Speaker 1

Okay. Well, looks like done. Thanks everybody for being on. We hope to see you at NAREIT. Take care.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.