CareTrust REIT - Earnings Call - Q3 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the CareTrust REIT Third Quarter twenty twenty Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to introduce your host for this conference call. Lauren Bill, you may begin.

Speaker 1

Thank you and welcome to CareTrust REIT's third quarter twenty twenty 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 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 risks 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 a more complete discussion of factors that could impact results as well as any financial or other statistical information required by 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 FAD 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 exclusion of GAAP reports. CareTrust yesterday filed its Form 10 Q and 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 include Bill Wagner, Chief Financial Officer Dave Sedgwick, Chief Operating Officer Mark Lamb, Chief Investment Officer and Eric Gilliff, Vice President of Portfolio Management and Investments. I will now turn the call over to Greg Stapley, CareTrust REIT's Chairman and CEO.

Speaker 2

Thanks, Lauren, and good morning or good afternoon wherever you are everyone. Q3 ran pretty much according to script, solid rent collections, improved testing capabilities, declining mortality rates and improving skilled mix to offset continued weakness in census. Anecdotally, day to day operations seem much more stable than they were initially, and we believe that seniors housing and skilled nursing industries are far more prepared to handle the third wave than they were six months ago. Engaging their near term prospects, we have dug into the operational analysis of our portfolio at a more granular level than ever to understand and project how our tenants are likely to fare in the coming months under a variety of possible scenarios. We are pleased to be reporting and we gave you some new data points to help you understand this in our supplemental yesterday that the HHS provider relief funds appear to be providing our skilled nursing operators with enough runway to continue operating comfortably for the next few quarters while vaccines, new therapeutics and other mitigating measures roll out.

We've expanded and enhanced our lease coverage reporting in order to show you exactly how these operators did in Q2, which was the first full quarter of pandemic impact both with and without provider relief funds. And we continue to track both metrics on a month by month basis. Now there are a lot of ways to calculate the impact of the relief funds on financial performance and operator health. And different operators are doing it very differently. But our methodology for estimating the amount of relief funds to show in the with relief funds coverage number is very conservative.

We spread all receipts to date ratably over the fifteen month period from last April to next June 30. We use that period because 06/30/2021 is when providers hit the use it or lose it point under current HHS regulations. Those regulations incidentally have been pretty fluid to date and a number of the deadlines announced by the government in connection with stimulus programs have been pushed out sometimes repeatedly. At present with over $30,000,000,000 in CARES Act funding still unallocated, we expect, but we're not projecting or counting on, we expect some additional relief funding as well as possibly some additional time to use the funds as the pandemic plays out. But we will stick with our conservative measurement methodology until the announced ground rules change.

So bottom line, we see several more quarters of fairly predictable and manageable operating performance, especially if the promised vaccines are effective and rolled out quickly. And we also see a path to a soft landing for most operators if we get into an extended recovery. We will continue to advocate for our healthcare providers as the pandemic continues to unfold, and we intend to continue providing you with as much meaningful data and transparency about them as we can. As for CareTrust, I'm pleased to report that we remain in great shape. From April through October, we collected over 98% of rents and with the exception of one small seniors housing tenant, November rent collections are on track and continuing to come in as expected.

With nothing drawn on our revolver and $25,000,000 in cash on hand, we have the lowest leverage in company history today at less than three times net debt to EBITDA at the moment. Interest costs on our floating rate debt are at historic lows and we have no debt maturities on the horizon before 2024. We were also able to post some modest external growth in the quarter despite the pandemic and the challenges that it poses for underwriting. And we've grown our pipeline despite the disruption in M and A activity in our space since April. Finally, we're raising and narrowing guidance for the year from our previous normalized FFO per share of 1.32 to $1.34 and normalized FAD per share $1.38 to $1.4 to our now projected normalized FFO per share of 1.36 to $1.37 and normalized FAD per share of 1.42 to 1.43 Finally, just looking forward, we feel good about our prospects for both collections and external growth over the next three quarters or so, which is about as good as our crystal ball ever gets, and we see great potential for a great 2021.

So first, I'll turn it over to Dave for some more color on what's happening out there, then Mark will jump in with acquisitions and Bill will finish off with the financials. Then we'll open it up for Q and A. Dave?

Speaker 3

Thanks, Greg. Good morning, everyone. I ended last quarter's call with some milestones we would be tracking to measure progress towards turning the corner on COVID. So let me start there with my comments today. First, clinical capability.

Both testing and treatments have improved dramatically since the beginning of the pandemic. Furthermore, most operators have now adapted to the COVID environment and largely put the initial disorientation and distress of the pandemic behind them. The second milestone we monitor closely is government funding. After four rounds of announced funding skilled nursing operators are in fairly stable shape and seniors housing operators have recently been given another chance at applying for funds. The third milestone we're watching is hospital volumes, both through the emergency department and electric procedures returning to pre pandemic levels.

Due to the fluid nature of the virus, recovery of hospital volumes has been limited idiosyncratic so far. We expect hospital volume to ebb and flow by markets depending on the continuation of future waves of infection. And fourth and finally, the milestone of course is the vaccine and we're encouraged by the aggressive efforts by industry and the FDA to bring an effective vaccine to market in record time. We're pleased to see the prioritization of nursing homes and seniors housing settings in those discussions. It is really good to see some genuine progress on several fronts.

Next, let me turn to occupancy. I'm pleased to report that from March through October, seniors housing occupancy in our portfolio has held steady compared to skilled nursing and the seniors housing sector at large. Overall, we did see a minor 100 bps drop in seniors housing occupancy over the last few months compared to June. Individual facilities have declined while others have actually gained occupancy this year. It's been impressive to see a couple of our seniors housing operators actually perform better during the pandemic than before.

For skilled nursing, not including Ensign, our overall occupancy has dropped seven ten bps or roughly 9% from March through October 31. But the higher margin skilled occupancy has increased four eighty bps or almost 31% over the same period. The additional skilled revenue provides a meaningful partial offset to the overall occupancy loss and increased expenses associated with COVID. Now I'd like to talk about the government relief funding and our reported lease coverage. We're grateful and applaud the federal and state governments for providing the level of support that they've given to the sector thus far.

Some operators have desperately needed the funds to bridge them until their fundamentals recover. Other operators have benefited from the security the funds provide in a very uncertain time and a couple of our operators have actually returned the funds altogether. The question on everyone's mind is do the HHS funds provide a sufficiently long bridge for operators to manage through until pre COVID operating conditions return? In other words, where's the risk in the portfolio? Traditionally TTM lease coverage has been the primary bellwether to assess risk of master lease rents.

Last year, we increased visibility by disclosing EBITDAR and EBITDARM lease coverage by operator for our top 10 tenants who account for roughly 80% of our revenue. Because of COVID and the HHS relief funds, reporting a meaningful coverage number for you became a real challenge this time. This challenge is magnified by the fact that there is no uniform methodology for operators to account for their provider relief funds resulting in some applying large amounts right away and others taking a wait and see approach. So simply reporting coverage based on financials as reported by our operators would be confusing at best. So we're reporting coverage this quarter by looking at two time periods, the first three months of COVID and also at the trailing 12.

And we're reporting those two periods in two different ways. First, by stripping out HHS funds. And second, what we believe is most important and most indicative of the operator's ability to outrun the pandemic, we show coverage including HHS funds amortized through June since as of now they have until June to use those funds. We're very pleased to report that through the second quarter overall portfolio EBITDAR lease coverage on a TTM basis stripping out all HHS funds is 1.94 times. Ensign certainly pulls up that average.

Without Ensign, that portfolio coverage without HHS funds is still a very strong 1.28 times. And for just Q2, the first quarter and likely hopefully the worst quarter of COVID EBITDAR coverage without HHS funds was 2.09 times and without Ensign, it was 1.3 times. Finally, we continue to be grateful and proud of our association with operators who are adapting, managing and in some cases improving during these extraordinary circumstances. Like I said last quarter, as we weigh the current challenges along with the support provided to date, we continue to see a path forward for our operators to continue to care for their residents and patients, keep their caregivers fully employed and pay their rent as they fulfill their role as a critical part of the solution to the crisis. With that, I'll pass the call over to Mark to talk about investments.

Mark?

Speaker 4

Thanks, Dave, hello, everyone. On the investment front, we got back on the board in Q3 with a great tuck in investment with our tenant, Adura Healthcare. The two building portfolio located in Helena, Montana had very little exposure to COVID and thus the financials did not have a lot of noise, which made the valuation pretty straightforward. We paid $16,600,000 for the two buildings, which moved to zero up from our seventh to fifth largest tenant as we added $1,500,000 in rent to our master lease with them. Year to date, our investment activity has produced 42,500,000.0 investments.

We continue to see a steady flow of opportunities coming across our desks, although not close to the pre pandemic volume we experienced back at the beginning of the year. Opportunities range from broken and non strategic to stable performing buildings as well as portfolios. We continue to see smaller operators looking to exit the SNF space for good and expect that trend to continue to happen over the next twelve to twenty four months. We're cautiously optimistic about some larger opportunities that we believe will be coming to market over the next several quarters and expect 2021 to be a really active year on the acquisition front. In the meantime, we continue to pursue opportunities that we feel we can pair with our existing operator bench and also some operators with whom we would love to commence a relationship that are currently in our operator pipeline.

Turning to the pipe, while our normal deal flow typically sits in the 100,000,000 to $125,000,000 range as a result of our singles and doubles approach to acquisitions, we're happy to report that we currently sit in the 150,000,000 to $175,000,000 range for deals that we feel very good about. The pipe consists of a few small portfolios as well as a few singles and doubles composed of both SNFs and seniors housing. The acquisitions in the pipe allow us to further strengthen our existing tenant relationships, but as we discussed on the last call, allow us to begin relationships with groups that we believe will enhance our ability to continue to grow our portfolio both in our existing footprint as well as in new markets. Please remember that when we quote our pipe, we only quote deals we are actively pursuing under our current underwriting standards and then only if we have a reasonable level of confidence that we can lock them up and close them in the relatively near term. And now I'll turn it over to Bill to discuss the financials.

Speaker 5

Thanks, Mark. For the quarter, normalized FFO was $32,500,000 or $0.34 per share and normalized FAD was $33,900,000 or $0.36 per share. At quarter end, our payout ratio remains at or among the lowest of our peers at approximately 74% on normalized FFO and 69% on normalized FAD. Leverage was at an all time low on a net debt to normalized EBITDA ratio basis of 3.1 times and net debt to enterprise value was 22. During the first quarter, we put in place a new $500,000,000 ATM and $150,000,000 stock buyback plan.

Neither have been utilized to date. Our liquidity remains extremely strong with more than $25,000,000 of cash on hand today. We also have 600,000,000 of availability under our revolver and we produce almost $9,000,000 of cash per quarter even after this year's increase in our dividend. Further, with our recent sale of our remaining independent living facility that we owned and operated, our net debt to EBITDA drops below three times. Cash collections for contractual cash rent in October were 98.7%, and we expect to end November collections at around 98% as well.

Moving on to guidance. Despite the pandemic, we are revising upward our previously issued guidance for 2020, which called for normalized FFO per share of $1.32 to 1.34 and normalized FAD per share of $1.38 to $1.4 based on 95,600,000.0 shares. We now project normalized FFO per share of $1.36 to 1.37 and normalized FAD per share of $1.42 to $1.43 based on 95,400,000.0 shares. With only a couple months to go in the year, let me update you on some of the assumptions that were used in our upwardly raised guidance. Rental income is projected at approximately $170,000,000 for the year, which only includes $80,000 of straight line rent.

Interest income is projected to be 2,300,000.0 Interest expense is projected to be approximately $24,000,000 and assumes a LIBOR rate of 30 bps. Interest expense also includes roughly $2,000,000 of amortization of deferred financing fees. G and A is projected to be between 15,500,000.0 and $16,000,000 and includes roughly $3,700,000 of amortization of stock comp. Guidance for 2021 will be provided in our year end press release. And with that, I will turn it back to Greg.

Speaker 2

Thanks, Bill. We hope this discussion has been helpful to you. We thank you again for your continued interest in supporting of CareTrust. And with that, we'll be happy to answer questions. Kevin, can you instruct them on questions?

Speaker 0

Our first question comes from Jordan Sadler with KeyBanc Capital Markets.

Speaker 6

Thank you and good morning out there. So first question just really on the pipeline. It seems that there may have been some developments overnight because it seems like the pipeline may have picked up even relative to the press release last night from one hundred twenty five to one hundred fifty to and one seventy five, I thought I heard Mark. So I'm interested in hearing sort of what the pipeline is comprised of in mostly SNFs and what pricing is looking like. And then I'm also interested to hear a little bit more about some of the larger opportunities you mentioned that could come to market and maybe if you could kind of give us some guideposts for what larger means?

Speaker 4

Jordan, it's Mark. So I'd say the existing pipe is made up of mostly SNFs. We're looking at some campus opportunities that do have a senior housing component, but no standalone seniors housing at this time. Your question on kind of future opportunities, just in discussions with the investment kind of advisor community over the last couple of weeks, we know that some larger deals are going to market. I would say somewhere in the anywhere between 50,000,000 and 100 and $50,000,000 And those are obviously auction processes and good quality assets we're is hearing, which is the composition of the portfolio.

So we're interested to see what those look like. We've seen much in 2020, a lot of the larger deals have been, call it non strategic. There was a couple that were announced earlier this week. And so we're cautiously optimistic about what is coming. I think as COVID has sort of played out, you know, have kind of come and gone and portfolios have been sort of held until, you know, people feel like there may be light at the end of the tunnel.

And I think in a few particular cases, the portfolios that we expect to see over the next quarter or two are have been held until people can kind of get their arms around the financials and hopefully we'll be able to underwrite a non COVID EBITDAR run rate assuming that something gets figured out early to mid next year.

Speaker 6

So just expanding on that a little bit, obviously, there's been some deterioration in census broadly speaking across the SNF space. And so when you're underwriting one, I mean, I assume you're looking at opportunities that include market level deterioration. I'm just wondering how you think about that and sort of regaining that loss census and then in your underwriting. And kind of a follow-up that would just be how is this affecting coverage underwriting and pricing? So

Speaker 4

the first question, you know, I think it's it's obviously important to kinda look at at pre pre COVID numbers, certainly understand what the level of skilling in place, you know, because you can have a drop you can have a drop in census. You can have a spike in in in in q mix or skilled mix. But is is the is the spike, you know, solely based on skilling in place? Or is there an actual uptick in more skilled patients coming in? It's probably gonna be a combination of both with probably a heavy slant towards skilling in place.

So so how we address that in the underwriting is is you try to structure it in in in the in the documents to make sure that there is a there is a safety net and that we we account for the downside risk in in other ways. So we're we're not necessarily solving all the problems just in our underwriting. I think the the other piece of it is is making sure that from a transactional perspective that we've covered ourselves from, you know, from anything that could take place going forward just depending on how long the pandemic plays out. From an underwriting perspective, really every deal is a little bit different. As you know, as we've sort of harped on this for five to six years now, every deal is different and a lot of the opportunities that we see on the underwriting side really have a lot to do with the operator that's exiting.

And so in each case as we have opportunities in our pipeline, a lot of the first assessment certainly what the portfolio is performing at today. But also where there can be some day one changes in terms of cost structure, in terms of insurance, in terms of maybe on the revenue side of capturing rate. So what we have historically discussed is low hanging fruit. So the underwriting really is kind of a fluid process in terms of looking at what are the in place economics of the buildings or the portfolios, but also where is the low hanging fruit with the operator that's exiting.

Speaker 6

Okay. Thank you. Our

Speaker 0

next question comes from Michael Carroll with RBC.

Speaker 7

Yes. Thanks, Mark. I want to kind of continue that line of questioning a little bit. I think that you were saying earlier that there are some smaller operators that are looking to exit the business. And I know CareTrust has been able to buy properties and retenant them.

Is that something you're still actively looking to do right now in the today environment? Or is it more of the bread and butter sale leaseback type transactions just given the uncertainty?

Speaker 4

I would say no. We are continuing to look for opportunities that folks are exiting the business and we can bring our existing operators into new acquisitions. I think there continue to be opportunities kind of once you strip out the HHS funding, operators still felt very good about being able to come in and take over. If you look at the transaction we did in the quarter, it was an operator who wanted to exit. Our operator at Duro felt very good about coming in and taking over and being able to kind of reach another level from a performance perspective despite acquisition opportunities with our existing tenant base.

Speaker 7

Does those deals take longer today just given the uncertainty and probably the difficulty to transition operations just given that we're in the pandemic? Or is it, I mean, it's just kind of just have to be more careful about it, but still possible?

Speaker 2

Mike, it's Greg. I think your questions and Jordyn's both acknowledge the truth that underwriting under the current conditions has become quite a bit more complicated. Why it's difficult to give you a simple answer. Every deal is so different as Mark says to begin with. And then you've got this temporary condition, hopefully temporary condition, you really don't know quite know how or when it's going to shake out and sort of normalize.

So we're trying to take those things into account and getting very granular with our analysis of these target acquisitions just as we've done with the lease coverage numbers that we gave you on our existing portfolio today. Just trying to understand what's really going on behind the scenes. And I think if there's ever been a time when our background as operators has been of benefit to us, it has never been more so than right now. So we continue to look at those deals. We're committed to continuing to grow.

We have great operators in the wings that we would like to bring in and great operators in the portfolio that we would like to expand. And we're not really while it's more difficult, we're not really going to let the pandemic slow us down. You ask about whether transitions take more time. Actually, you know, transfers of operations are not more complex. Some of the documents around them take a little more time to do under the current conditions.

But it's really just the underwriting and evaluating and creating the safety nets in our transactional structures that Mark talked about which can take a variety of forms that we're not don't necessarily want to talk about here. But all of that getting to the deal is much more laborious now than it's ever been. But actually doing the deal once that's set is fairly straightforward. When we say that things are pretty calm out there and that the operator community seems to be ready to handle a third wave, that they're much better prepared. It's true.

We are in a much different environment today than we were six months ago. Things feel I mean there's new things happening every day in the facilities but they're used to them. And it's now standard operating procedure, all this infection control and limited access and everything else. So it's really complicated in that respect, but it is sort of tough to get to the right numbers and get them over the finish line. Hope that helps.

Speaker 7

No, it does. And then just one last question. What is the competitive landscape right now? I mean, there a lot of capital on the sidelines waiting to kind of get into this space? Are you competing against the same players that you were previously?

Or has it just been so quiet that there's not a lot of people being active?

Speaker 4

Yes. No, would say it's similar to what we've experienced over the last twelve to twenty four months, private, well capitalized buyers who are sophisticated with respect to their understanding of the SNF business. So maybe we're starting to maybe see some of our repairs that we are hearing about that are sort of off the sidelines and back and engaged. So yes, I would say there's a substantial amount of capital looking for opportunities to find out.

Speaker 8

Okay, great. Thank you. Sure.

Speaker 0

Our next question comes from Jonathan Hughes with Raymond James.

Speaker 9

Hey, good afternoon from the East Coast. Thanks for the prepared remarks and disclosure. Dave, was hoping you could talk about what happens to Trillium's EBITDAR coverage. That one kind of stuck out to me on the drop in the second quarter.

Speaker 3

Yes. Hey, Jonathan. Thanks. Yes, so Trillium goes up to the top 10 because of the rent increase that they had taking Trio's place. And the first quarter of the COVID experience really took its toll on Trillium.

An increase in labor costs and a decrease in revenue resulted in the numbers that you can see there. The good news is if there is any and there is, is that Q3 is better than Q2. Still not quite up to the one times coverage without HHS funds but a lot closer. And we feel like they are making the changes that they need to, to their business to manage through this. Trillium is a great example actually of just how important these HHS funds are and that disclosure that we show amortizing the relief funds through June year kind of shows that.

And again that amortization schedule does not include any future expected additions to the relief funds that we think are coming from the government.

Speaker 9

Okay. That's very helpful. That disclosure is really useful. So thanks for putting that together. Jordan already covered my question on the pipeline.

So just one more for me. I if I know that the pipe is a little bigger than even last night and you guys are optimistic, but and if we roll into January, February and we don't see some money moving out the door in terms of investments, could we expect a larger dividend raise than in prior years to share some of the cash flow with investors? It's been raised 9% annually for the past five years, which is very strong. But I mean, could it be even higher if the investment pace kind of remains a little muddied as we turn the calendar?

Speaker 2

Jonathan, it's Greg. We really haven't talked about that. There's probably not a lot that I should say in projecting what dividend is going to be like last year. I will say that historically, we've been very committed to making sure that, that multiyear dividend graph keeps ascending at a solid rate. But we've also been very committed to maintaining a payout ratio that puts funds back into the company when possible because that's our cheapest form of capital and some of the best return that we believe we can give to our shareholders.

And so I don't know what the dividend is going to look like when the time comes to visit that next February, March. But I will tell you that we remain committed to both of those concepts and we will work through it as we see what the next few months bring. Back to your question about timing with respect to these deals, I think it's important to sort of look at what we're saying in light of the normal cycle for deals that happens every year. We're not accustomed in this space to seeing a lot of deals coming to market in November and December. Usually, they've come by September and October when we're hitting the NIC conferences.

And then everybody kind of goes silent until January when people get back after the holidays. So while we do have hopes for closing some additional deals this year And we also have some stuff in the pipeline for next year. I'm not sure exactly what the timing on any of those will be. And we just ask you to hang in and watch the tape. And we'll keep putting points on the board as they're good points to be had.

Speaker 9

All right. I'll be patiently waiting. Thanks for

Speaker 8

the time guys. Thanks.

Speaker 0

Our next question comes from Steve Valiquette with Barclays.

Speaker 10

Hi, thanks. Hello, everyone. Thanks for taking the questions. So also just sticking with the lease coverage ratios on Page six. Basically at the top 10 tenants, if you look at column three, which excludes the relief funds credit at the column one, it is interesting that seven of the companies are up on their coverage ratio and only three are down.

I would have thought maybe across the industry you might have that ratio or that percentage reverse the other way. So I guess I'm just curious, what do think are the common operating characteristics of the seven operators that were able to drive better rent coverage in that June? I would have thought to be the period 'd have the biggest fall off in post acute patient volume being referred in from the acute care setting, etcetera. So I was curious to get more color on what drove some of those positive trends?

Speaker 3

Hey, Thanks. This is Dave. Yes, that's a great question. And the answer really lies primarily in having a couple of things. One you have what we have in our top 10 is not what you would consider an index of skilled nursing space.

We really do pride ourselves in partnering with best of breed operators. And this business pre pandemic, during pandemic, post pandemic is incredibly leadership sensitive and management sensitive. You have the same exact brick and mortar, but you change out the operator and you have very different results even with the same exact employees and patients and residents. And so management matters massively and I think that's what you see in these numbers. And then when you look at the commonalities as you're asking about, the ability to skill in place is a huge factor because not only do you pick up skilled patients that are higher margin patients But you also have the ability to market yourself as a solution to the problem to the communities.

So in many of our operators they not only are dealing with the pandemic but they're positioning themselves to become the operator of choice for not just the hospitals but assisted livings in the area that have to find a solution to taking care of these COVID residents. So as you have that ability to skill in place to effectively take care of these patients that is what's largely translating into these numbers.

Speaker 10

Okay, that's helpful. And just to confirm too, is Premier the only company in that list that's predominantly senior housing focused?

Speaker 3

Premier is seniors housing as is the Pennant Group, number six. I'll remind you Pennant was part of the Ensign Group until they spun off about a year ago and that is primarily a seniors housing operation for us. They also do home health and hospice services besides that.

Speaker 10

Yes. Yes, they're probably so we can track that one. Yes, okay. Okay. Yes, think that covers it.

Maybe just to do a quick follow-up. I don't know if you'll take the bait on this one or not. But if you had to guess just directionally for next quarter when these ratios are all shown, would it be directionally improving or maybe staying about the same or maybe falling off slightly if you just had to give at least a directional view of how things might trend when that was reporting these ratios for the third quarter?

Speaker 3

Well, I think what you'll see is a bit of a mix. And I say that because in some cases and I think what we'll probably do is continue to show the time period of the pandemic versus a trailing 12 number. And as you look at just the pandemic numbers versus the three months of the pandemic, you'll see that some folks who were hit hard at the outset will likely be able to show some improvement as they've been able to make some adjustments to how they manage it. And in other cases you might find that in that first quarter some of these operators who were able to benefit from skilling in place were able to do that without really being hit too hard by the pandemic. As you know, it was in Q3 that the second wave really hit the Western States where a lot of our facilities are.

And so that as we know can be a blessing and a curse on the financial side of things depending on how they manage it. So I'm not going to be able to take the bait completely and tell you that it's going to go up or down for as a whole. But I think you will see some mixed results there. But I think you might be surprised with some people continuing to do well through all six months.

Speaker 10

Okay. That's some great color. All right. Thanks.

Speaker 0

Our next question comes from Daniel Bernstein with Capital

Speaker 8

One. Hi. I just echo, I appreciate the disclosures on the before and after HHS funding on the coverages. That was very helpful. The one question I have is CMS have been recently putting out some toolkits for home health and really in an effort to maybe decrease use of institutional facilities for skilled nursing.

And mean very much in its infancy, right? And then also you look at the home health public home health providers are piloting some skilled nursing at home. Do you see skilled nursing at home as a threat to the skilled nursing industry and maybe related a threat to assisted living occupancy as well?

Speaker 2

Hey, Dan, it's Greg. I'll weigh in and I'll let you guys jump in as well if I missed something. But this is a conversation that's actually not new. It's kind of intensified since pandemic began. And there's a lot of opinions floating around out there about whether or not some percentage of the traditional skilled nursing population is going to move to home health.

And as well as some comments by Sima Verma recently that I read the question whether some of the traditional long stay Medicaid patients in the nursing facilities might be better served in Our assisted position has always been that those individuals who really could go someplace besides skilled nursing have always gone there. And while there may be some extraordinary things going on right now with some stretching by home health and assisted living to hang on to residents or to attract residents and some extraordinary things going on with respect to the fears of being in a skilled nursing facility. We believe those are subsiding already and that there's going to be a nice snapback to some semblance of normal. Will some move? Maybe.

The patient population has been shifting around the healthcare continuum for a long, long time. People that were in nursing homes years ago are in assisted living a lot longer now. That's, you know, a demonstrated fact. And so we expect that dynamic to continue. But we also expect the hospitals to continue to push, you know, to get their senses back up.

There will be a lot of pent up demand for some of those elective surgeries. And we expect that the hospitals will continue to push patients out quicker and sicker and skilled nursing is the only destination for the vast majority of those. Don't know Dave, Mark, anything else to add?

Speaker 3

No, that's good.

Speaker 8

Great. I couldn't say better myself right there. I guess related to that is it sounds like you think the discharge patterns will probably return to normal at some point in the skilled nursing space. I think that's been the other debate is whether there's been a permanent change in those skilled nursing patterns, but discharge patterns. But it sounds like you think that may some semblance of normality will return when elective surgery come all the way back.

Is that right or is it a little bit too early to make that judgment?

Speaker 3

Well we think it's certainly too early to call time of death on skilled nursing returning back to normal. Our thesis is that once we've turned the corner, once the country reopens and life gets back to normal that we return basically to the pre COVID conditions as we had them before both in the operating environment, labor environment and the discharge environment from the hospitals. Okay.

Speaker 8

One more for me which is some of your peers have been doing preferred and mezz funding and loans out there rather than bringing assets right on the balance sheet right away. As part of your pipeline, are you looking at mezz preferred kind of lending deals rather than just straight acquisitions?

Speaker 2

Dan, it's Greg. We actually have looked at some mezz and preferred recently. We don't we are not counting any of that in our pipeline at this very moment. But we're open to it. We've done preferred in the past.

And we actually have, I think, pretty good prospect on the horizon. We'll see how long it takes to come to fruition for some more preferred development that we're excited about. And in terms of the mezz, never done it before. Haven't really viewed mortgage lending as our thing. But certainly not adverse to it if the deal is right and the collateral is good.

Speaker 8

Okay. That's all I've got. Talk to you soon.

Speaker 3

Thanks, Jeff.

Speaker 0

Our next question comes from Montana Brie with BMO Capital Markets.

Speaker 11

Hi. Good morning to you guys. Just a follow-up question from what Dan was asking. So is the bigger picture that the elective procedures haven't come back for your particular customer segment despite the fact that the hospitals are saying overall the elective procedure volumes are coming back, but maybe just not for your target segment? Or is it be the second choice that you're just losing share at least temporarily to other options maybe including health?

I'm just trying to understand the drivers of census.

Speaker 3

Yes. So the discussion of elective procedures is there's a little bit of nuance there Juan because the vast majority of the patients that come skilled patients that come to a skilled nursing facility started their journey through the emergency department, not really through conveniently scheduled elective surgery. There certainly are those but over the last ten, fifteen years those numbers have shrunk quite a bit as hips and knees and kind of the easy patients have largely shifted to being discharged straight home with home health and things like that. So the patients that are arriving in skilled nursing facilities are sicker than ever before. And this is certainly true pre pandemic.

And so occupancy, yes, is going to depend somewhat on those elective procedures. But really it's going to depend more on the country reopening so that people are out living their lives as they were before which results in far more visits to the emergency department and then ultimately to the skilled nursing facilities.

Speaker 11

So you don't think that there's been a loss of share per se then?

Speaker 3

No, I don't think we have we don't have that data to come to that conclusion.

Speaker 11

Okay. And then just my last question is just on the balance sheet. I mean, you guys are at an enviable position. Is that because you want to protect the downside and don't know how long this is? Or should we think of it at this point, given the strength you've seen with the coverage numbers you talked about for the second quarter ex the government and that you have visibility to in the third quarter that you guys are kind of ready to go on offense and lever up from here.

How are you thinking about that big picture?

Speaker 5

Juan, it's Bill. I think you can look at it as the trend in leverage has gone down because of the acquisition because of COVID. But I would expect, given our stated range of leverage being four to five times, that over time, we would probably, depending upon the deal, the yield, and the size, that over time, we would get to a more to a higher level of leverage as opposed to where we sit today, which is sub-three.

Speaker 11

Thank you.

Speaker 0

And I'm not showing any further questions at this time. I'd like to turn the call back over to our host for any closing remarks.

Speaker 2

Thanks, Kevin. And thank you, everybody, for being on the call today. As always, if you have any other additional questions, you know where to find us and we're happy to visit with you anytime. Have a great weekend and stay safe.

Speaker 0

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.