CareTrust REIT - Earnings Call - Q3 2021
November 8, 2021
Transcript
Speaker 0
Good day, and thank you for standing by. Welcome to the CareTrust Free Third Quarter twenty twenty one Earnings Conference 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 hand the conference over to your speaker today, Lauren Bill, CareTrust Senior Vice President and Controller.
Thank you. Please go ahead.
Speaker 1
Thank you and welcome to CareTrust REIT's Third 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 management's current expectations, assumptions and beliefs about SurQuest 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 action. 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 the Trust'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, the REIT and affiliates its do not undertake to publicly update or revise any forward looking statements or changes arise as a result of new information, future events, changing circumstances or for any other reason. During the call the company will reference non GAAP such as EBITDA, FFO and FAD 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. Earlier this morning CareTrust 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 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 are Dave Sedgwick, President and Chief Operating Officer Bill Wagner, Chief Financial Officer Mark Lamb, Chief Investment Officer and Eric Gillis, Senior Vice President of Portfolio Management and Investments. I'll now turn the call over to Greg Stapley, CareTrust REIT's Chairman and CEO. Greg?
Speaker 2
Thanks, Lord, and good morning, everyone. Last quarter, we were concerned about the near term effects of the rising wave of Delta variant infections and the possibility of a stall in the census recovery that was just getting underway. Fortunately, those concerns were short lived and we can report the occupancy gain to steadily continue in most markets with a few facilities actually having fully recovered in census. While we're still far from pre pandemic occupancy overall, the continuing trajectory of the census recovery is consistent with our expectations so far. These gains on the census and revenue front are welcome news, but only half of the equation.
A shortage of qualified workers and a sharp rise in labor cost is a growing challenge, especially as patient and resident census rises. Several of our tenants report turning some patients away simply because they lack the necessary staff to care for more. In spite of the challenges still facing both the skilled nursing and seniors housing industries, pricing for assets and skilled assets in particular has been unusually strong. As Mark will explain more fully in a moment, our disciplined underwriting approach is dictating that we forego some opportunities while we wait for pricing to rationalize. When that happens and it always does eventually, we expect to benefit from having lots of dry powder on hand.
We believe that the value of that discipline is more evident than ever in our portfolio today. With the exception of one small short term deferral, our tenants have been able to pay their rents right along this year despite the effects of the pandemic. While the industry is not yet out of the woods, I would be remiss if I did not know for the record that we do see some encouraging indicators of strength emerging in our portfolio independent of the provider relief. Dave will talk more about that in just a moment. That said, we're very pleased with the quarter.
We posted double digit normalized FFO growth of 13% over the same quarter last year and normalized FAD growth of 15.1%. We collected 96.2% of contract rents in Q3 and 96.1% thus far for October, with the shortage being the one deferral that we disclosed last quarter, which we still expect to collect by twelvethirty one to bring us to 100% of rents due thus far this year. We grew the portfolio with $32,500,000 in new investments in the quarter, bringing our total capital deployment this year to over $1.80 $104,000,000 and if things come together as planned, we're maybe not quite done. We paid down our revolver following the acquisition and held leverage steady at a comfortable net debt to EBITDA of 3.7 times at quarter end. And as Bill will discuss in a moment, we are raising our 2021 guidance today.
Speaker 3
To cap it off, we
Speaker 2
got together with most of our operators last month at our Annual Operator Conference, which was held in person here in Laguna Beach. I think it left everyone who came really invigorated and better prepared to tackle whatever comes next. So we are constructive on the long term future of our portfolio and Care Trust remains well positioned to continue pursuing our mission of pairing great operators with meaningful opportunities to transform individual opportunities for the better. With that, I'll turn it over to Dave. Dave?
Speaker 3
Thanks, Greg, and good morning, everybody. Let me begin this quarter by thanking all of our skilled nursing operators for joining us at our recent annual operator conference that Greg just mentioned, speaking for all of us at CareTrust, bumping fists, hearing real time updates from Mark Parkinson of the American Healthcare Association and sharing best practices for a few days was incredibly energizing and informative. We're so proud of our association with a group of operators that we consider to be among the best in the country. In the conference, we spent a lot of time sharing what's working best to address the current COVID and labor challenges. Virtually all of our operators agreed that their occupancy recovery has slowed because of tight labor.
The flip side of that is that our operators for us and our operators is that a question at the beginning of the year about SNF demand has been answered. Demand is high and the recovery would be much further along if not for the tight labor market. Nevertheless, we're seeing some operators and some facilities hitting either record occupancy numbers or close to them. We continue to be impressed by those who are managing this latest challenge well. Let me share with you just a few examples of the progress we're seeing and hearing in the portfolio, what Greg just referred to as some encouraging indicators of strength.
Ensign, our largest tenant reported four sequential quarters of occupancy growth and enjoys lease coverage north of three times. We cannot overstate how exceptionally well they've performed through this pandemic. Priority Management Group has grown its occupancy 6.7 percentage points since its low in December. Aduro has improved its coverage during COVID, excluding all provider relief funds. Trillium has slashed agency costs by over $400,000 a month since the summer and staff turnover from 60% down to 20%.
Trio Healthcare has vaccinated one hundred percent of its employees and is nearing record high occupancy and skilled mix. Covenant Care slashed agency usage from a February high of around $1,000,000 a month to under $100 a month right now. And momentum created a special security unit to access and care for the large county hospitals difficult to place patients, growing occupancy and earning some valuable goodwill with their referral sources along the way. Occupancy is 13.5 points higher than last summer. I could go on.
These are the types of successes that we don't get to read about in the news but are happening throughout the portfolio. Again, let me say thank you to all of our operators and their teams for the extremely heavy lifting they've been doing these last twenty one months. These positives don't mean that many of them won't need or benefit from the next round of provider relief funding. We believe all of our operators have applied for Phase four except for Ensign and Pennant who have not needed or accepted relief funds from the beginning. We'll find out how much the Phase four funds extend the runway for each operator as funding amounts are determined and checks are received in late November and December.
But it's great news for our operators, skilled and assisted living alike who have needed those funds so far. Occupancy growth will also be critical. In Q3, our skilled nursing operators reported continued occupancy recovery from the prior quarter, resulting in a projected return to pre pandemic levels sometime next summer. While just under 20% of our skilled nursing facilities are still operating below 80% of their pre pandemic occupancy, the majority, almost 60%, are back above 90% of pre pandemic occupancy. And on the skilled mix front, the Delta surge appears to have actually given a balance to some of our operators in the regions most affected.
Overall portfolio skilled mix remains about 300 bps higher than the pre pandemic levels with the higher reimbursement rates that offset some of the overall occupancy loss. Of course, this projection assumes that qualified labor is available and that no new headwinds such as a new variant or wave of infections intervenes. For seniors housing occupancy, overall occupancy in our relatively small AL portfolio remains unchanged from Q2 in spite of the fact that admissions are significantly up. The treadmill here with AL occupancy is really a result of one of our operators electing to discharge a host of residents for various reasons. Now that that's largely done, we expect to see our seniors housing occupancy begin to recover more quickly from here on.
Turning now to lease coverage. With few exceptions, overall coverage remains very healthy, both with and without provider relief funds. A couple of our operators have really needed those funds to extend their ability to survive and ultimately recover from the impacts of COVID. Our top 10 operators coverage, which accounts for over 80% of revenue continues to be strong at 2.2 times for property level EBITDAR and 2.76 times of EBITDARM. Our relatively transparent coverage disclosure will prompt questions around individual operators.
So let me go ahead and address three of them right here. First, last quarter we talked about Noble Senior Services, Services, one of our seniors housing operators and their request for some flexibility in paying a few months of rent. You will have noticed both the investment total and rent numbers increased for Noble since last quarter. That is a result of transitioning the second of two Premier facilities to Noble in Wisconsin. Around this time last year, we began talking to Premier about transitioning their two Wisconsin facilities, which were outliers for Premier.
Noble's top performing facility was nearby. And at the time, again last year, Noble as a whole was performing a little bit ahead of their expectations in spite of COVID. We saw this transition as a win win for both operators. The two buildings transitioned this year, the first in March and the second in July as regulatory approvals were required and took some time. We're happy to report that Noble's admission rates have really picked up lately.
But as I noted a moment ago, their discharge rate has also been unusually high primarily due to an internal review that led to discharging a number of residents that were not best served in their settings. These discharges represented 12.5 percentage points of their overall occupancy. We think that's essentially done now, but of course it's left a significant hold in their near term revenues. They hadn't received provider relief funds previously, but they have applied for and expect Phase four assistance. So in September, we agreed to defer approximately ninety days of rent under an arrangement for them to pay it all back plus the rest of their $20.21 rent by the end of this month.
Their obligations under the agreement will be funded from their proceeds of our pending acquisition of their two memory care facilities in New Jersey. That arrangement, which is only dependent now on the imminent receipt of regulatory approvals appears to be on track. After that, they still have a ways to go to get to positive lease coverage, but the Phase four provider relief funds and other government assistance will be immensely helpful in the meantime. And perhaps more importantly for the long term, as I noted, we believe that the discharges are over And with the increasing pace of admissions, their occupancy numbers should finally get some traction. Second, Covenant Care is a SNF operator whose month over month occupancy and coverage is actually trending really positively in recent months.
We're in a minority piece of their overall portfolio and the corporate credit is very good as their other facilities are reportedly performing well. We're optimistic that their recovery trend will continue. Finally, let me talk about Bay Shire Senior Communities. They're seniors housing and skilled nursing operator that took over two of the four beautiful large campuses in California we acquired early in the year plus another in El Centro, California. The Bayshire team has a positive momentum in those three assets and we expect them to near stabilization soon.
So we remain very constructive on both the near and especially the long term prospects for our skilled nursing and seniors housing portfolio. The combination of steadily recovering census and continuing relief funding, especially for the AL operators bodes well for them, even though it's no guarantee of success for the most challenged. We will continue to monitor and report. With that, I'll pass the call over to Mark to talk about investments. Mark?
Speaker 4
Thanks, Dave, and good morning. In Q3, we executed on a $32,500,000 acquisition of two skilled nursing facilities Texas that we can currently lease to operating affiliates of the Ensign Group. The two assets are well located and practically brand new. And it will be exciting to watch Ensign ramp them up over the coming months. The acquisition brought our total investments in 2021 to $184,200,000 From a market perspective, on the skilled side, we continue to see one off deals with mostly non strategic and struggling facilities.
As you would guess, deal flow for stabilized assets has been very light as stabilized assets are understandably harder to come by for the moment. And with respect to value add assets, the ongoing government support of the SNF industry has kept some owners afloat. Owners that we would have normally seen selling their assets as property level economics turn negative while they deal with challenges of reduced occupancy and higher labor costs. So with stronger than usual demand for fewer than usual assets on the market, pricing for skilled nursing has surprisingly spiked, just when you thought there might be a COVID discount. In fact, on a price per bed basis, SNFs have been trading at all
Speaker 5
time
Speaker 4
highs, including many assets with little to no cash flow. In other words, yes, Virginia, there is a Santa Claus for Smith sellers this year. Seniors housing is its own story. There's a large range of assets on the market from Class A to Class F and everything in between. A lot of those assets appear to be mispriced as well.
Although we have seen a few more reasonable numbers for the mid market product that we typically pursue, we are looking hard at some opportunities where we think we can get risk adjusted returns you're accustomed to seeing from us. I would remind everyone that we've consistently reassured the market that at any point in the real estate cycle where pricing becomes unsustainable, we stick to our underwriting discipline to ensure that we keep our portfolio healthy and well positioned for the long term coverage growth. So we continue to tap our extensive industry contacts for appropriately priced opportunities, which is why we've been able to close $184,000,000 in largely off market deals year to date. And as Greg mentioned, there may be more from the years done. But we will not chase mispriced assets or place our tenants in untenable situations where their rents and the annual escalators will remove their lease coverage to a point that is unsustainable.
Looking to 2022 and 2023, the investment sales community continues to express an expectation that a wave of deals will become in the market based on the record number of broker opinions of value or BOVs they're being asked to issue by prospective sellers. We can't predict exactly when, but we expect that pricing will eventually settle as the pandemic subsides, supply chain issues are resolved, interest rates rise and credit standards inevitably tighten.
Speaker 3
In that environment, we'll be ready
Speaker 4
to use our consistently conservative balance sheet to grow more aggressively with quality assets in good markets and above all with best in class operators. In the meantime, we continue to eye every deal out there for opportunities that might fit and our operator partners. And we believe we'll get our fair share of them. Our current pipe sits in the $125,000,000 to $150,000,000 range. The pipe is made up of singles and doubles with a couple of solid smaller portfolio opportunities that we believe are a good fit for our operators.
The pipe is split roughly evenly between SNFs and senior housing facilities. Please remember that when we quote our pipe, we only quote deals that 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 relatively near term.
Speaker 6
And now I'll turn it over
Speaker 4
to Phil to discuss the financials.
Speaker 7
Thanks Mark. For the quarter, normalized FFO grew by 13% over the prior year quarter to $36,700,000 and normalized FAD grew by 15.1% to 39,000,000 On a per share basis, normalized FFO grew by 11.8% over the prior year quarter to $0.38 per share and normalized FAD grew by 11.1% to $0.40 per share. Moving on to guidance. We plan on issuing guidance for 2022 when we release twenty twenty one's year end results. For the remainder of 2021, we are raising our previously released guidance by $01 on the low end of the range to normalized FFO per share of $1.49 to $1.5 and normalized FAD per share of $1.58 to $1.59 This guidance includes all investments and dispositions made to date, share count of 96,500,000.0 shares and relies on the following assumptions: one, no additional investments, dispositions or rent deferrals, cuts or reserves, 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 approximately $186,000,000 which includes less than $40,000 of straight line rent. Three, interest income of approximately $2,000,000 Four, interest expense of approximately $23,800,000 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. Not included in interest expense was the $10,800,000 charge that we recorded in Q3 related to our Q2 bond refinancing.
The $10,800,000 was made up of $7,900,000 of redemption fees and a $2,900,000 write off of deferred financing fees. And five, we are projecting G and A of approximately $19,600,000 to $21,500,000 This range is consistent with what we discussed last quarter. Our G and A projection also includes roughly $7,000,000 of amortization of stock comp. Our liquidity remains extremely strong with approximately $23,000,000 in cash, $520,000,000 available under our revolver and we produced roughly $12,000,000 in cash per quarter after paying the dividend. Leverage also continues to be strong at a net debt to normalized EBITDA ratio of 3.7 times today.
Our net debt to enterprise value was 25.1% as of quarter end and we achieved a fixed charge coverage ratio of 8.5 times. Lastly, cash collections for the quarter came in at 96.2% of contractual rent and October came in at 96.1%. I would expect November to be much like October based on the color given today on this call. As Greg mentioned, we do, however, expect to collect this shortfall before year end. And with that, I'll turn it back to Greg.
Speaker 2
Thanks, Bill. Everyone, we hope this discussion has been helpful for you. We certainly appreciate your continued interest and support. And with that, we're happy to open it up for questions. Sadie?
Speaker 0
Yes, sir. For our first question, we have Juan Sanabria from BMO Capital Markets. Juan, your line is open.
Speaker 6
Hi. Thanks for the time. Just hoping to spend a little bit more time on Noble. The two assets that you guys are moving, just curious on if those were EBITDAR negative and or coverage enhancing for Noble? And or is the rent that's staying with those assets staying in place with Noble?
Or just curious on how we should think about that and or the risks for rent on those two assets being lower than what was subscribed to it under the prior lease? Just a little bit more color on that piece would be helpful.
Speaker 3
Yes. The buildings were not covered, so they were under one times coverage. Were chronic underperformers for Premier. And one of the things we really liked about putting them into Noble's hands last year when we were looking at it was that Noble's say their top performing facility is in Wisconsin nearby to these two premier assets. They're strongest local leader and most consistent operator.
So this created the opportunity for them to build on that strength, form a nice little cluster and we felt like it gave those two buildings a better chance to get back to stabilization than they were. And Premier agreed. So the rent came over at the same amount to Noble. But there's some work to do there to get those you know, to be performing. Since the transition happened they have under Noble's care improved slightly on a coverage perspective but they still have some ways to go to get north of 1x coverage.
Speaker 6
Okay. And just to clarify, there's not assets being taken out from Noble to be given to a new operator? I was just reading over the 10 ks and I was a little confused about maybe another two group of assets or are those the same two assets?
Speaker 3
Yes. So there's two groups of two assets. So I understand why there's some confusion. The reason why I talked about these two Wisconsin buildings that were added to Noble is to address the question of why Noble has actually increased in investment size and rent in terms of our relationship with them. And it's because of that, because they took over those two assets from Premier that we started negotiating last year and then has finally took place this year.
The other two assets that we've been talking about for Noble, one is a building in Fort Myers, Florida which has been offline since they stepped into the lease back in 2019 for major renovations and getting that back ready to go. That's still a ways out from being ready and licensed. The other one is a building in Baltimore, Maryland that's actually being actively marketed right now for sale. So those are probably the other two buildings that you're thinking about from the queue.
Speaker 6
And so once those buildings are carved out, is that coverage enhancing? Or do you have a sense of what the pro form a coverage would be just to give us a pro form a type number?
Speaker 3
I don't have a pro form a number at my fingertips, but absolutely. When Fort Myers is removed and Baltimore is removed, those will be significantly coverage improving for Noble.
Speaker 6
Okay. And then just switching gears to the pipeline. What gives you the confidence, I guess, that prices won't stay where they are, cap rates lower or price per unit is high? And that we've seen significant cap rate compression in other asset classes with low rates and who's to know where interest rates go. So just curious of what you see changing or what you think you're not willing to match versus some of the other buyers out there in terms of underwriting?
Is it just the speed of the recovery? Or is it the underlying value of the assets that may or may not change? Just curious if you could provide a little bit more color on that.
Speaker 4
Well, I think this is Mark. I think just talking to the investment sales community and understanding that eventually the spigot is going to get turned off. So I
Speaker 5
think we feel
Speaker 4
like pricing at some point will rationalize. And so I think over the next probably twelve months we'll start to see more and more opportunities. So am I answering your question? Is your question why we think pricing will go south?
Speaker 6
Yes. Why will it normalize and or where are you different, I guess, in the underwriting versus the people who are winning the bids? Is it just they're more aggressive on the time line of a recovery or just have a placing a greater value on the underlying real estate and ops?
Speaker 4
I think the folks that are winning bids, I think, are making some assumptions on certain states, specifically states that have CMI based Medicaid rates and are assuming pretty aggressive increases in Medicaid rates. That's not something that we're necessarily willing to underwrite going in the door. What operators can do day one, you know, whether there's certain insurance costs or kind of very easy well-being through day one changes, we'll take those into consideration. But getting on an operator to increase their CMI which then increases their Medicaid rate which would increase coverage. There are some nuances to that that give us a whole lot of comfort and there are operators that are willing to take that risk and move off of those assumptions.
Speaker 5
Thank you. And
Speaker 0
for our next question, we have Jordan Sadler from KeyBanc Capital Markets. Jordan, your line is open.
Speaker 5
So wanted to just dig in a little bit more on Noble. Dave, it seems like there's a third group of two assets, which are the two assets that you'll be purchasing in New Jersey, the memory care assets, just to make matters more confusing on the pair. You give us a little bit more color on those two assets and how that transaction is going to come into the fold? How much so maybe how much you'll be paying and what the valuation will be?
Speaker 3
Yes. So those two assets are owned by Noble. There's just some regulatory one last regulatory hurdle to pass and then we can execute that purchase, which we think we'll do in this month if all goes according to plan. Those are two about forty, forty five bed facilities for memory care in New Jersey that have been empty for quite some time and being renovated. They have been renovated.
We'll probably, once we acquire them, put a little bit more into it to get them really beautiful and ready to go. The process in New Jersey takes a little bit longer than other states to get license once you have certificate of need. So we're likely going to start collecting rent on that sometime in first half of next year, hopefully first quarter, but sometime in the first half of next year. We are likely going to have a different operator run those than Noble. We are currently marketing the facilities, having really good conversations with a host of interested operators.
We're going be touring the facilities with them soon, and we have some time because of licensing to get that lined up, but there's been a lot of interest in them for operators that are already in and around New Jersey. The purchase price on that is around $12,000,000 for those two buildings.
Speaker 5
And then you'll put in how much additional?
Speaker 3
TBD, but probably under $0.02 $5,000,000
Speaker 5
Small amount. Okay. And then those will be leased to somebody else at a yield that we would expect to continue Yes.
Speaker 7
That's right. Most likely.
Speaker 3
But because they're empty, there's going to be a bit of a ramp in that rent. So once they get stabilized, then we'll land at sort of that normal yield that you expect from us.
Speaker 5
Okay. And then just clarifying on the two that are well, Baltimore and Fort Myers, it sounds like Baltimore will be sold. I'm curious there what the sale price might be and then how the rent credit like what the rent credit would be maybe on a yield basis relative to the value back to Noble? And then maybe if you could clarify what's happening with Fort Myers?
Speaker 3
Yes. So with Baltimore, we will find out what the market says about the price for Baltimore. I don't want to whisper a number to the market while it's being actively marketed at this time. But we will take those proceeds and hit it with kind of what you might expect a rent yield to be for that and adjust the rent accordingly. In Fort Myers, there have been some since that building went through a full renovation, as it's gone through licensing with the fire authority, they've discovered some shortcomings that they'd like us to shore up before we reopen it.
And they're pretty extensive and so that's what's caused the delay there. But we have our Director of Construction Services has been boots on the ground there very recently talking face to face with their fire authority in collaboration with Noble to try to move that along.
Speaker 5
Okay. That's helpful. Hey, last one, maybe get Mark in the conversation here. It sounds like you're not closing the door on the $250,000,000 to $300,000,000 of acquisitions you guys have done historically, a little bit of a ways to go. Is that the right cadence we should be coming away with?
Speaker 4
Yes, I mean, it's obviously getting late in the year. I mean, I think what we have kind of teed up in the pipeline, think it's going to get us quite maybe the historical number that you saw pre COVID. But what we do have in the pipeline, we're pretty excited about. And so it would just be a function of how quickly we can get through diligence and get operators signed up.
Speaker 0
For our next question, we have Amanda Sweitzer from Baird. Amanda, your line is open.
Speaker 8
Great. Thanks for taking the question. Hopefully, last follow-up on Noble here. But do you know if Noble currently has any debt against the two assets that you're acquiring that they need to pay off? Or should we really think about that purchase price for those assets as a one for one cash infusion for Noble?
Speaker 3
They have some debt that will be paid off from the proceeds. And the largest amount of the proceeds will go toward paying off the deferral and prepaying rent and other obligations for us.
Speaker 8
Okay. That's helpful. And then on staffing, for the operators that you mentioned where you are seeing those lower agency costs, are you also seeing less occupancy restrictions or are those operators generally trading agency labor for full time staff and are still then facing staffing constraints overall?
Speaker 3
So thanks for asking because I think it gives me a chance to correct something. When I was talking about Covenant Care, I was nudged here at the table that said I said that their costs went from $1,000,000 a month down to $100 a month, but that's really $100,000 a month for Covenant Care. So as it relates to our operators in general, most of them are saying that there's some limitation on how much they for the skilled side, not so much for the senior housing side, but for the skilled side how much they can admit because of tight labor. There's really two ways to approach that. You can continue to admit and staff with agency which takes a big cut to your margin, Or you can stay with lower occupancy and keep agency out.
We have operators that are basically approaching it in both of those ways. And there's pros and cons to both of those approaches. So I'm not sure if that answers your question, but that's how they're approaching it now.
Speaker 8
No, that's helpful. And then last question, following up on your senior housing portfolio and some of the improved trends you're seeing there. Can you quantify how big the occupancy uptake is that you've seen quarter to date?
Speaker 3
Unfortunately, I can. Seniors housing occupancy quarter to quarter really has remained flat.
Speaker 8
Appreciate the time.
Speaker 0
And for our next question, we have Michael Carroll from RBC Capital Markets.
Speaker 9
Dave, can you go back and talk a little bit about the internal review that you were highlighting about Noble? I guess what drove that internal review and where were those residents? Where did they move to? What was the better setting?
Speaker 3
Well, I think the concern was appropriateness of care. So in other words there's really kind of two things let two pools of concern. One was appropriateness of care and the second was payer source. So it's one thing to admit residents, but if they aren't able to pay over time then you have a problem and you kind of have phantom revenue there. So that was an issue.
And the other was just the appropriateness of care most common around either acuity or behavior, things like that. So there is what prompted it was management finally coming to grips with some lingering issues and taking a hard look at what they had in a handful of their facilities, really a couple of their buildings where they had kind of persistent problems. And as they dug into it they realized that there were collection issues and those collection issues were not unrelated to some of these behavioral issues as well and finally just made some policy decisions around the types of residents that they can really appropriately take care of.
Speaker 9
So that 12.5% drop, was that how many communities within or I guess out of how many within their portfolio? And were they moved to what behavioral health facilities or skilled nursing facilities or those types of assets?
Speaker 3
They would be. I didn't we didn't really keep track of where they went, so I couldn't give you specifics on what percent went where, but you're right, that's where people would go or other assisted living facilities that specialize in behavioral type health as well. So within seniors housing, you have all sorts of specialties and the buildings that they had just didn't have that capability to take care of that population. It was concentrated at a couple of the buildings.
Speaker 9
And that 12.5% occupancy drop, that was at the whole portfolio or just select buildings?
Speaker 3
Their whole portfolio.
Speaker 9
Okay. So where is occupancy at for Noble for their portfolio today?
Speaker 3
I might have to get back to you on that one, Mike.
Speaker 9
Okay. That would be helpful. And then can you talk a little bit more about Premier? I I know their coverage ratio has been pretty low over the past few years. I mean, moving those two assets to Noble out of that portfolio, where does coverage ratio go?
Is it closer to one times?
Speaker 3
Yes, it is. It's creeping up. We've been receiving we just saw Premier at a conference this last week, had a really good conversation with them, had a good relationship with those guys. They're starting to see some traffic pick up in their Michigan portfolio. They expect more move ins, net increases by the end of this year.
They've applied for the phase four funding and rural funds as well. So things are actually a little bit better and stronger at Premier today than they have been in a long time and removing the two Wisconsin facilities has helped that.
Speaker 9
So when you say it moved up a little bit, I think it was around 0.8 times last quarter. And obviously, they fell out of your top 10, so I don't believe it's in this most recent report. But is it back up to 0.9 times? Or how much is does that removing those two assets really help them? And can we take them off the watch list?
Does it help them that much?
Speaker 3
No, think we're going to probably take Premier off the watch list until they're comfortably north of one times. And they still have a ways to go. I think their coverage in the quarter was fairly consistent with what it was the quarter before, maybe a little bit down. What I was referring to is more real time information that we have in Q4, just looking at their occupancy and talking to them about their costs. We expect that it's starting to creep up right now.
Speaker 9
Okay. And then just my last question for Bill. Can you talk a little bit about the CPI rent escalators within the company's leases? I believe you have 2% in guidance, and CPI has been well ahead of that. I guess what CPI should we typically look at for those?
And is it above 2%? Or is that really going to be a 2022 event versus 2021?
Speaker 7
Yes. Hey, Mike. CPI, most of our leases contain CPI W and CPI U. It is for the last few and as you know, leases contain floors of zero in caps. Most of them have caps.
Ensigns capped at 2.5%. CPI came in for them above 2.5% on June 1, but we still raised them by 2.5. The other caps go up to like, I think it's 3.5% and CPI has been well above 2.5%. So they've so our assumption of 2% in guidance for the rest of the year, which we only have a few tenants with bumps in Q4, isn't really material if it goes from 2% if I use 2% or 2.5% or 3%.
Speaker 9
Okay. So if we're looking to 2022, it's safe to assume that we're probably closer to that 2.5% range given where CPI has trended?
Speaker 7
Correct. Yes.
Speaker 10
Okay, great.
Speaker 3
Thank you.
Speaker 0
For our next question, we have Steven Valiquette from Barclays. Steven, your line is open.
Speaker 11
Hello, everybody. Thanks for taking the question. Actually a couple of questions here really on the decision by Ensign Group, an announcement from a week or two ago about starting a captive REIT within their company. I guess for the near term and long term, maybe just break up the questions that way. I guess I'm curious in the short term, with this slowdown, the pipeline of deals that you've done with them, they had a lot of positive comments on their call about continuing to do transactions with existing re partners, etcetera.
But maybe I'll just pause for a second, get your high level thoughts and ask a few follow ups on this topic as well. Let me just start to get your thoughts around any implications for you guys short term or long term and then we'll go from there. Thanks.
Speaker 2
Sure. This is Greg. Look, I don't think it changes things very much for us. We have good relationship with them and you saw it in our deal with them in the quarter to do the two Austin facilities. In that case, we brought those facilities to them having tied them up previously.
And I really think that's probably the only way that we would be doing deals with Ensign in the future. It's really the only way we've done deals with them. Their cost of capital has always been good enough. Their availability of capital has been good enough. If they found a deal, they could finance the deal.
And they've done their own deals, and they've done them very, very, very well. That said, with their captive REIT, I'm not exactly sure what they're going to be looking at. If they continue to look at the same kind of distressed assets that have been their bread and butter historically, I don't think there's going to be a ton of overlap. But to us they really just represent another player in a large marketplace with lots and lots and lots of players that we compete against. And I don't think we're too worried about whether we will get our fair share the deals.
Does that answer your question?
Speaker 11
Yes. Yes, it's helpful. Maybe just two quick follow ups on the same subject. One of them you sort of have answered already. But if we look at Ensign Group and Pennant combined, I think your total number of properties combined back in 2014 was 94 and that would be 106 currently between the two.
So if you've added a couple of properties per year under that combined relationship, it sounds like you were bringing those properties and transactions to them as opposed to the other way around. So it sounds like going forward that that will still be the case based on what you said. Just want to confirm that.
Speaker 2
Yes. And actually what happened was we bought a four building portfolio with an enzyme lease in place last year. And then we did this deal with them this year. I can't think Mark, we've done anything else with them. We bought we did a covenant care attack on with a building with them.
Again, a building we brought to them.
Speaker 3
And they grew a little bit when they acquired Five Oaks, which is
Speaker 4
a smaller operator of That's right.
Speaker 2
They bought one of our operators and just stepped into the lease that was already there. So those are the kind of deals that we do with them. Again, they have they're a great operator. They have superior cost of capital. If they source a deal, they're going to do that deal themselves every time, I would.
Speaker 11
Okay. And just a sanity check on just the expiration date of your master lease with Ensign Group right now. And then when you own the real estate, I'm guessing there's really no risk of losing any of your current lease property arrangements with them. But maybe just long term, is there something should we assume that's all would stay in place for long term? Or is there risk on long term that something changes as far as the size of the relationship on an existing
Speaker 2
Yes, that's a good question. I'm glad you brought it up. It gives us a chance to remind everyone that when we set those leases up in 2014, there's eight master leases and they are all they all have staggered maturities with various two, three, five year extension options that Ensign can exercise. And they are all well diversified in terms of geography, asset class and asset quality. And our that was done so that we would be able to have the expectation that this is a very high likelihood that those would be renewed as those renewal options come up.
Speaker 11
Okay. One last real quick one. The Did you know that this strategy was coming from them for a while or is this maybe catching you guys surprise a little bit as far as their decision around this? Just curious if you have any high level response to that?
Speaker 2
No, I don't think anybody should have been surprised. Landsign has been telegraphing to the market literally for years that they wanted to do something like this without saying exactly what it was going to be. But I think everybody's known that they have a sizable real estate portfolio that they have built since the 2014 CareTrust spin off. They've done a terrific job with it. And I think a good solid logical step for them in terms of just making sure that they get credit for the value of the real estate equity that they continue to create and build up in that portfolio just as they did with the portfolio that we started with.
So they're doing a great job.
Speaker 11
Got it. Okay. That's all very helpful. Thanks.
Speaker 2
You bet. You bet.
Speaker 0
For our next question, we have Daniel Bernstein from Capital One. Daniel, your line is open.
Speaker 10
Hi. Thanks for taking my calls here my questions here. I'd to go back to the skilled mix that you noted, which has been increasing. I wanted to kind of understand a little bit more about how you think about the sustainability of that increase in skilled mix and maybe how much of that was related to maybe PDPM versus the uptick in COVID in 3Q?
Speaker 3
Hey Dan, I'm not sure that we could attribute the skill mix increase or decrease or any movement there to PDPM necessarily. We've always compared the numbers pre pandemic to post and we had about six months of PDPM in those pre pandemic numbers. Roughly we're at about fifteen point five percent for skilled mix on our skilled nursing portfolio for pre pandemic. We've seen it go as high as 25.5% in December. It kind of came down to in June a high 16% and slowly eked back up to a September number of 18.5.
I think that's largely because of the delta variant. And we'll see. A lot depends on how long the three day qualifying stay waiver stays in place. We think that is a key element of course to these numbers. Whether or not that is a permanent change you know very well is anybody's guess but probably not something that is worth putting a lot of money on.
So I think when the dust settles on COVID and we could say that it's far in the rearview mirror we'd probably get back down somewhere closer to those pre pandemic skill mix levels.
Speaker 10
Okay. All right. And then on the pipeline, obviously, with some of your operators and the high lease coverage, Ensign giving back PRF funds, they don't need that. But it seems like maybe from an industry level, the industry needs continued PRF funds or other federal state support. So is that kind of playing into the idea that you're going to get a pickup in acquisitions and better pricing down the road, that funding maybe goes away next year, and then we'll maybe we'll see some more distress or I don't know if distress is the right word, but you will see more assets come to market where operators need financing or a way out financially.
Speaker 4
Dan, this is Mark. Yes, that's exactly, I think, the way we view it. We've already seen some smaller operators head for the hills. We're currently working on a transaction right now where that was the case. We closed the deal in El Centro earlier this year with Bay Shire for the same type situation.
So yes, I think when the PRF funds get turned off, when the public health emergency eventually expires, FMAP funding stops flowing, then I think we'll start to see a significant amount of transactions come to market. And I think at that point, supply is going to outstrip demand and I think that's when price per bed will start to fall. Okay.
Speaker 10
And then one last question on the labor side.
Speaker 2
I think you noted maybe some easing up of
Speaker 10
the labor pressures at some of your operators.
Speaker 4
Is that
Speaker 10
a matter of increasing wages? Or are they actually seeing increased job applications, more people coming back to the market to work? Just trying to understand maybe the dynamic there that's giving you some green shoots on labor.
Speaker 3
Dan it's really a combination of both. We do see higher wages across the board to very varying degrees. On the other hand with the unemployment benefit lapsing and people burning through their savings from COVID and, you know, the people coming back to work as well. What we've seen is in the operators that have had the most success it's those who bring that same tenacity and follow-up and prompt response that they have around admissions from the hospital to applications. You combine that tenacity and intensity with a focus on culture and providing a great place to work.
And we do see operators that are able to move the dial in a significant way in the face of an otherwise difficult macro
Speaker 6
environment. Okay. So better operators are
Speaker 10
having better performance, I guess, or less issues on the labor side, all things being equal?
Speaker 3
Yes. Go ahead.
Speaker 10
I was going say that's the questions I had.
Speaker 0
For the next question, have from Jordan Sadler from KeyBanc. Jordan, your line is open.
Speaker 5
Hi, guys. Just a quick follow-up on the repurchase options and then maybe looping in just as a reminder, does Ensign do any of the Ensign properties have repurchase options or any of those necessary leases rather?
Speaker 3
No, just the Texas four that we acquired, but none of the original properties.
Speaker 5
Can you remind us when the Texas four opens up?
Speaker 3
2027.
Speaker 5
2027. And then coming back to purchase options, the disclosures on Page 13 of the deck. It looks like the first group of purchase options are probably with Noble, I'm guessing, just because it says one of the properties is held for sale at September 30. That sort of the right assumption? And because I would assume if that were the case, it would be unlikely they'd be exercising.
Is that fair?
Speaker 3
That's fair. Yes, we think it's pretty unlikely at this point as well.
Speaker 5
Okay. And then the next couple down on that list are SNFs. One opens up January 1, and that's kind of a bigger chunk. Can you share who that is and what the expectations are around that?
Speaker 3
So Jordan, let me correct what I said about the Texas IV with Ensign. That's actually that option opens the end of twenty twenty four. And then the next guy in line is a SNF operator in the Midwest and we also based on their current performance would say that it's pretty unlikely that they are in a position to exercise. But we can't know for sure until we get closer.
Speaker 5
Can you share what the cap rate is on that the fixed cap rate on that lease revenue? You share what that is?
Speaker 4
I don't think it's a fixed price.
Speaker 2
Let's see.
Speaker 3
Let me get back to you on that, Jordan.
Speaker 5
No worries. Thanks, guys.
Speaker 0
And for our next question, we have Steve Manaker from Stifel.
Speaker 2
Looks like Steve's off. Is there anyone else, Sadie?
Speaker 0
We don't have any further questions at this time. You may continue.
Speaker 2
Great. Thanks, Sadie. Well, thank you everyone once again for being on today. If you have additional questions, you know where you are. We're happy to engage anytime and we look forward to hearing from you and hopefully seeing you in the conference soon.
Thanks everyone.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.