CareTrust REIT - Q3 2024

Transcript

Operator (participant)

Thank you for standing by. My name is Prila, and I will be your conference operator today. At this time, I would like to welcome everyone to CareTrust REIT Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to report your question, please press the star followed by the number one again. Thank you. I would now like to turn the conference over to Lauren Beale, SVP Controller. Please begin.

Lauren Beale (CAO)

Thank you, and welcome to CareTrust REIT Third Quarter 2024 Earnings Call. We will make forward-looking statements today based on management's current expectations, including statements regarding future financial performance, dividends, acquisitions, investments, financing plans, business strategies, and growth prospects. These forward-looking statements are subject to risks and uncertainties that could cause actual results to materially differ from our expectations. These risks are discussed in CareTrust REIT's most recent Form 10-K and 10-Q filings with the SEC. We do not undertake a duty to update or revise these statements except as required by law. During the call, the company will reference non-GAAP metrics such as EBITDA, FFO, and FAD. A reconciliation of these measures to the most comparable GAAP financial measures is available in our earnings press release and Q3 2024 non-GAAP reconciliation that are available on the investor relations section of CareTrust's website at www.caretrustreit.com.

A replay of this call will also be available on the website for a limited period. On the call this morning are Dave Sedgwick, President and Chief Executive Officer, Bill Wagner, Chief Financial Officer, and James Callister, Chief Investment Officer. I'll now turn the call over to Dave Sedgwick, CareTrust REIT's President and CEO. Dave?

Dave Sedgwick (President and CEO)

All right. Hello, everybody, and thank you for joining us. The flywheel started to pick up speed a year ago, and it is now racing. At the end of last year, we recognized that 2024 could be a historic year for growth, and the company recalibrated the team and the balance sheet to capitalize on that opportunity. I am so proud of their relentless work to make this year extraordinary. As you may know, yesterday we announced that we entered into a material contract to acquire a portfolio of 31 skilled nursing assets around Tennessee for a purchase price of $500 million, investing $442 million at an estimated yield of 9%, expected to close by year-end. This deal will continue to expand the influence of some of the country's very best operators who have a proven ability and commitment to caring for their employees, residents, patients, and communities.

James will provide additional color in a minute. We also announced yesterday that we expect to acquire $57 million of skilled nursing facilities in the Northeast next month. We don't normally announce transactions before they close, but due to the size of the Tennessee deal and the imminent timing of the Northeast deal, we decided to announce these along with earnings. So now, as we round third on the year, we are equally excited for next year's potential to diversify and grow the business significantly. Thus far, in 2024, we have delivered the following: first, year-over-year market cap growth of 123%; second, record-setting investments of approximately $917 million at an average stabilized yield of 9.4%; third, we announced pending acquisitions of approximately $500 million of skilled nursing facilities with a 9% stabilized expected yield to close during the last two months of the year.

The combined year-to-date investments and announced pending deals produce projected 2024 investments of over $1.4 billion at an average stabilized yield of 9.3%, fourth, equity issuance of approximately 41 million shares for gross proceeds of $1.1 billion, and fifth, a net debt to EBITDA of 0.08 times. On last quarter's call, I commented on how two things are equally remarkable: not only this year's growth, but also the sense that momentum was actually building. Now you know, at least partly, what I was referring to. As we sit here today, our pipeline, including these two pending deals, is $700 million, almost all of which are real estate acquisitions.

A quick comment on the makeup of this year's investments: including the pending November and December deals I referenced, we will have closed on the following: over $1.4 billion, approximately $825 million of that are real estate acquisitions, and $590 million of debt investments, or roughly 60/40 acquisitions to loans, all at a blended estimated stabilized yield of 9.3% after any rent ramps take effect. Allow me to give you some more color on the return on investment we've achieved on the targeted loans we've made over the past few years. For a few years now, we have been executing a strategic approach to lending that includes, at the very least, a handshake with the borrower, JV partner, or operator, that they will bring us real estate acquisition opportunities in the future.

At best, the debt investment activity also includes more than a handshake, either a loan-to-own or loan-and-own a part of the portfolio. This approach has been incredibly successful for us, as our friends in the industry have made good on their word and brought to us deals, many of which are off-market, that we would not have otherwise seen nor won. We made a total of approximately $200 million of debt investments from 2022 through 2023. Looking at this year's $1.4 billion of expected deals, approximately $780 million of acquisitions are a direct result of these strategic debt relationships we've fostered over the past couple of years. Our underwriting discipline has not changed. We do not grow for growth's sake, and we are driven by our mission to expand the positive influence of operators who improve and dignify the care communities that they serve.

And that's a nice segue to the portfolio. Last week, we had our operator conference, wherein we brought renowned experts in policy, staffing, reimbursement, mental health, and healthcare AI to educate our operators on what is best in class and what's to come. It's one way we try to add value and show how grateful we are to them. I cannot tell you how energizing it is for our entire team to rub shoulders with leaders who are engaged in the noblest of professions day in and day out. We're proud to associate with them and proud to report that they continue to provide superior star ratings and quality ratings compared to the industry nationally and the states that they operate in. While there's no perfect way to measure quality care in skilled nursing, Medicare's star ratings do provide some tea leaves.

As of September's ratings, I'm pleased to see our operators achieve an average of three stars versus 2.8 stars in the states that they operate in. Our operators' quality measures performance is even stronger, with an average of four stars versus 3.4 industry stars. As former operators ourselves, we have an absolute conviction that sustainable financial success can only be achieved after clinical success. You will see in the supplemental lease coverage continues to show tremendous strength and security overall. Property-level EBITDA with a 5% management fee and EBITDA coverage was reported to increase 2.23 times and 2.85 times, respectively. The scale of underperforming operators remains small and manageable. We have a couple of transitions underway and a handful of assets for sale that, when transitioned and/or sold, will result in higher revenues next year since they have not been rent-producing this year.

I'm very pleased to report that the Midwest skilled nursing portfolio with negative lease coverage that we've talked about for over a couple of years was sold in the quarter. These transitions and dispositions taken together will effectively deal with all of the properties that have underpaid this year. Finally, three observations. First, I'm very proud, again, of the CareTrust team. An extraordinary year like this doesn't happen without a talented team, a strong culture, and sacrifice. Second, I want to again recognize the tireless pursuit of quality care and performance by our operators. We are truly blessed to work with some of the finest operators in the country and proud to report superior lease coverage, quality measures, and star ratings. Third, we are at the start of demographic tailwinds that should last for decades to come.

James will now provide you with color on the investment landscape and reloaded pipeline.

James Callister (CIO)

Good morning, everyone. During the third quarter, as previously announced, we closed on approximately $441 million of new investments, largely consisting of a $260 million loan and a $43 million preferred equity investment in connection with the borrower's acquisition of a large portfolio in the Northwest, including 37 skilled nursing and assisted living facilities to be operated by affiliates of the PACS Group. Since quarter end, we have closed on approximately $89 million of additional investments, including the acquisition of a four-facility, 396-licensed bed skilled nursing portfolio located in the Mid-Atlantic for approximately $75 million. These facilities have been master leased to a new tenant relationship for CareTrust, with an initial term of 15 years, with two five-year extension options, and a year-one contractual lease yield of approximately 9.3%, inclusive of transaction costs and with annual CPI-based escalators.

In addition, yesterday, we announced an updated investments pipeline of $700 million, which includes the announcement of a CareTrust-affiliated joint venture having entered into binding agreements to acquire 31 skilled nursing facilities for an aggregate purchase price of approximately $500 million, exclusive of transaction costs. CareTrust is expected to contribute approximately $442 million to the venture and, in exchange, will own 100% of the preferred equity ownership interests in the venture and 50% of the common ownership interests. The portfolio consists of a total of 3,290 licensed beds, with 30 of the facilities located in Tennessee and one in Alabama. Completion of the acquisition is subject to customary closing conditions and is expected to close in two phases during December of 2024. A majority of the facilities will be operated by existing CareTrust tenant relationships, including affiliates of the Ensign Group, PACS Group, Inc., and Lynx Healthcare.

Initial annual base rent to the venture is approximately $44.4 million. The company's initial contractual yield on its combined preferred and common equity investments in the venture is expected to be approximately 9% after estimated transaction costs. The announcement of this transaction should provide a fantastic way to finish out what has been an extraordinary growth year for CareTrust and set the stage for continuing the momentum into 2025. Please remember that when we quote our pipe, we only quote deals that we have a reasonable level of confidence we can close on within the next 12 months. Now, a quick note on the current transaction environment. As the updated pipeline indicates, the skilled nursing transactions market remains active, with deal flow being consistently strong. We continue to see regional owner-operators and smaller independent owners looking to sell as they seek to capitalize on improved operating conditions.

The buyer pool continues to be somewhat narrow, but buyers who bring certainty of closing continue to have a distinct advantage. With respect to assisted living, there remains a good amount of distressed assets coming across our desks. With that said, we are seeing improvement in operating metrics, including occupancy, and we are seeing an increase in the number of buyers looking to potentially transact. Senior housing assets that have an AL Medicaid waiver component are drawing stronger interest from buyers, including from middle-market acquirers. So while the acquisition market remains competitive, we continue to leverage our relationships and our disciplined investment approach to identify opportunities that offer appropriate risk-adjusted returns and that match the right operators with the right assets.

With demographic trends in our favor and an ongoing supply and demand advantage for post-acute and senior care, we are confident that the sector provides significant runway for future growth. With that, I'll turn the time over to Bill.

Bill Wagner (CFO)

Thanks, James. For the quarter, normalized FFO increased 66% over the prior quarter to $60.9 million, and normalized FAD increased by 60% to $61.9 million. On a per-share basis, normalized FFO increased $0.03 to $0.38 per share, and normalized FAD increased $0.02 to $0.39 per share. And again this quarter, because of our replenishing robust pipeline, we continued to take advantage of our ATM and issued $500 million of equity under the ATM during the third quarter, resulting in us having $377 million of cash on the balance sheet at quarter end. Since quarter end, we have used roughly $89 million for investments and have approximately $230 million of cash on hand as we sit here today. We will use $57 million to fund the investment that will close in November, leaving us with roughly $175 million.

In yesterday's press release, we updated and raised our guidance for this year from normalized FFO per share of $1.46-$1.48 to a new range of $1.49-$1.50, and for normalized FAD per share from $1.50-$1.52 to a new range of $1.53-$1.54. This guidance includes all investments made to date, including the one that will close in November, a diluted weighted average share count of 152.6 million shares, and also relies on the following assumptions: one, no additional investments other than the announced pending $57 million deal closing in November, nor any further debt or equity issuances this year; two, CPI rent escalations of 2.5%. Our total cash rental revenues for the year are projected to be approximately $216 million-$217 million.

Not included in this number is the amortization of a below-market lease intangible that will total about $2.9 million, but this will be in the rental revenue number as required by GAAP. Three, interest income of approximately $65 million. The $65 million is made up of $50 million from our loan portfolio, and $15 million is from cash invested in money market funds. Four, interest expense of approximately $30 million. Interest expense also includes roughly $2.5 million of amortization of deferred financing fees. And five, G&A expense of approximately $26 million-$28 million and includes about $5.8 million of deferred stock compensation. If the announced acquisition does close in Q4, it will trigger one-time short-term incentive compensation that will require us to accrue additional expense in Q4 that is not included in this range. Our liquidity continues to remain strong.

We have approximately $230 million in cash today and our entire $600 million available under our revolver. As announced, we are working to upsize our revolver to $1.2 billion. I believe that this amount is already committed by our lead banks as we begin the syndication process. Leverage hit an all-time low with a net debt to normalized EBITDA ratio of 0.08 times. Our net debt to enterprise value was 0.4% as of quarter end, and we achieved a fixed charge coverage ratio of 9.7 times. Lastly, as long as the price of our equity relative to the current cost of a long-term debt issuance remains pretty comparable, we continue to believe that it makes much better sense to continue to fund this replenishing pipeline with equity. But given the strength of our balance sheet, we love having all options on the table.

With that, I will turn it back to Dave.

Dave Sedgwick (President and CEO)

All right. Thank you, guys. Let me conclude the call with four things. First, our projected total 2024 investments of $1.4 billion equals over six years of growth compared to our life-to-date average annual growth rate. Second, we have a balance sheet that provides enormous flexibility and historic capacity for both the near-term and midterm. Third, looking at next year, a full-year impact of this year's investments should produce meaningful FFO share per share growth without any additional investments. And fourth, if you look at consensus growth projections over three years from 2023 through 2026, we have the lowest multiple amongst healthcare REITs today. We hope the report's been helpful to you, and thanks for your continued support. Happy to take some questions.

Operator (participant)

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, simply press the star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, please press the star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, please press the star one to join the queue. Your first question comes from the line of Jonathan Hughes with Raymond James. Please go ahead.

Hi. Good morning out there. Great to see the recent investment activity in the pipeline. I was hoping you could talk about the trade-off between investment volume and deal structure. Many transactions this year have come with preferreds or JV or a multi-year stabilization period, which is a little more complex than historical investment activity. So are those more complex structures necessary to get these transactions to the finish line? And if you were to have done the more simple deal structuring, would that activity have been lower?

Dave Sedgwick (President and CEO)

Great question. And I think the answer is clearly yes. We would certainly always prefer a vanilla triple net deal with no strings attached and no partners attached. However, you look at these deals that have had the added complexity, they have largely come to us only through a relationship. And most of it has been off-market completely. So folks are out there tying up deals, and the friends of ours who do that know that they've got a great partner in us to help them transact. And because for the last couple of years, we've made it pretty clear that there's got to be true long-term real estate economics for us, that conversation is becoming much more efficient and productive than, call it, a couple of years ago.

All right. Very helpful. Thank you for that. And then just sticking with the pipeline, I think there's $200 million outside of the pending transactions. And when I look at those, I think the implied yields are in the double digits, pushing maybe nearly 11%. Maybe what's the mix of that, call it, $200 million or so between kind of the own and the loan or the loan-to-own investments?

James Callister (CIO)

Hey, Jonathan. This is James. The vast majority of it is definitely owned. Yield pushes a little higher based on some structuring stuff with the deals, but it's nearly all real estate acquisitions. Very little loan activity is in the remainder of the pipeline after you take out the Tennessee deal and the $57 million Northeast deal announced.

Yep. Okay. That's helpful. And then just one more for me. There was a peer of yours recently talked about moving into the REIT or seniors' housing operating structure. And James, you did talk about more seniors' housing opportunities in the transaction market. Obviously, you're, call it, 90% skilled nursing. And Dave, I know that's your background, and that's where the core focus of the company is. But curious as to your views or interest in REIT opportunities?

Dave Sedgwick (President and CEO)

Yeah. So I'd say for about the last, oh, 18, 24 months, as we've been getting that question, the answer really hasn't changed, and it's this. It's a compelling, interesting opportunity for the right opportunity. We're not going to do it just to do it, but if we can find sort of that Goldilocks opportunity where it's a sufficient size that it matters and it comes with some great people that are experienced in the REIT format and it comes with exceptional operators, if you know of that, give us a call. But that's kind of what we would be open to doing, so I would say, yeah, it's very interesting. We're open to it. We certainly have plenty on our plate of the traditional triple net business, though.

All right. Thank you for the time.

Thanks, Jonathan.

Operator (participant)

Your next question comes from the line of John Kilichowski with Wells Fargo. Please go ahead.

John Kilichowski (ED of Equity Research)

Thank you. So just kind of going to the portfolio deal here. I don't know if you've announced this before or ever given this information, but maybe you could just talk about the coverage of these assets in particular and then also kind of dive into the Lynx relationship. I know that on your coverage sheet, they don't have anything because a lot of their stuff is pre-stabilization, but maybe what the assets in this portfolio look like?

James Callister (CIO)

Yeah. So hey, John, this is James. The assets in the portfolio vary a bit by tenant, but overall, I would say they cover just shy of a one going in, but each of the tenants has a stabilized pro forma that probably puts it at like a 1.5, and so we're excited about that, and we're excited about the tenant mix. Lynx is performing fairly well based on the transaction we did with them a couple of years ago. We kind of expect that upward trend to continue with them. They've been doing a great job. I think that their depth of looking at this transaction and these facilities was really impressive to us. They dug in all the way, and we feel really confident about their ability to really exercise on these facilities and be a great part of the overall portfolio with the other tenants.

John Kilichowski (ED of Equity Research)

Got it. And James, if I could follow up on one from your opening remarks just about the acquisition environment or the transaction environment, how do we think about competition eventually re-entering the market? It sounds like, obviously, given the numbers you're able to put up, that you found a vertical that you can really compete on your own in. But at what point do you worry that this opportunity set gets competed away or private capital comes back? Or do you feel like you've kind of developed a moat here given your cost of capital and that you're seeing capital not really likely to re-enter this new space anytime soon?

James Callister (CIO)

It's interesting because while the buyer pool is somewhat narrow, John, it's still incredibly competitive. It's very active with private money and others buying for the same deals, right? And so I don't know how much of an impact others re-entering may really have. It really is very competitive already. There are a lot of buyers out there whose appetite at times seems insatiable. And so I don't know if new buyers coming in is really going to change that much at all for us.

Got it. Well, thank you and congrats on the quarter.

Thanks a lot, John.

Operator (participant)

Your next question comes from the line of Austin Wurschmidt with KeyBanc. Please go ahead.

Austin Wurschmidt (Senior Equity Research Analyst)

Great. Thank you. And I want to just go back to the portfolio deal and was hoping, Dave, maybe you could just provide some additional detail on the nature of this structure for the joint venture and the kind of preferred common interest. And curious if there's any ability for you or right of first refusal for you to take down the remaining common interest over time?

Dave Sedgwick (President and CEO)

Yeah. I'll let James talk to that.

James Callister (CIO)

Hey, Austin. Yeah. So the breakout really is the preferred equity is the vast majority of what we would be putting in, being close to $425 million of it. And that's not a preferred equity that comes back or has a term on it or anything like that. So it stays out there forever. And we do, at a couple of periods during the investment horizon, we do have a call right, and the JV partner has a put right. So we do look forward to having the opportunity to acquire the entire venture ourselves down the road and still have it be accretive to us, which is kind of why we structured the put call the way we did.

Austin Wurschmidt (Senior Equity Research Analyst)

Can you give us a sense how far out that call right is?

James Callister (CIO)

Between years 1 and 30. No, I'm kidding. Between about 4 and 7, call it.

Austin Wurschmidt (Senior Equity Research Analyst)

That's helpful. And how long did it really take for you to get the deal to this point? I mean, was this one of the earlier large portfolio transactions that was presented to you from the time, I want to say, 12-15 months ago that you started kind of discussing the investment pipeline plus large potential portfolio deals? Just any color there would be helpful.

James Callister (CIO)

No, I think this came around, call it, April to June is when it kind of first started percolating, Austin.

Austin Wurschmidt (Senior Equity Research Analyst)

Has there been any strategic focus to expand the geographic footprint? Or are the deals, would you say, taking you to these new markets? Just curious kind of the chicken and the egg there.

James Callister (CIO)

Really, it's the deal that takes us to the new market. We have areas we like, and we like to grow and shore, but we really take it on a deal by deal. It has to be the right deal first before we really focus on exactly where it might be in terms of targeted growth, and this one fit what we were looking for as a deal first.

Austin Wurschmidt (Senior Equity Research Analyst)

Very helpful. Thanks for the time.

James Callister (CIO)

Thanks, Austin.

Operator (participant)

Your next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.

Yep. Thanks. James, I wanted to follow up on an earlier question where you talked about coverage ratios with this portfolio transaction. I mean, I believe you said that the going-in coverage ratio was one going up to 1.5. I guess first, is that an EBITDA coverage ratio? And second, what's driving that improvement? Is it something that these new operators are doing differently to drive that type of uptick? Or I guess what's actually driving that better pro forma expectation?

James Callister (CIO)

Yeah, that is an EBITDA coverage, Michael, and I think each of the sub-portfolios is a little different, but I would say there's some uproom in occupancy. The Medicaid rate has gotten better in Tennessee, and it's these operators' abilities to really operate efficiently and reduce costs, in particular, with some of the ancillaries and whatnot, so that's kind of where the growth is going to be coming from, from the operators.

Okay. Was there a big Medicaid rate increase? So that goes to trailing numbers doesn't include that Medicaid rate increase, but now it does. Is that what you said?

The trailing does include part of it, yeah.

Okay. And then are these new leases that you have with Ensign, PACS, or Lynx, or are they going to be included in your existing master leases?

Because the real estate will be owned by the venture, Michael, they got to be new master leases, but they are on consistent terms with what we have.

Okay. And then the type of transactions, James, that you're looking at, I mean, are there more stabilized deals just given the improvement that we've seen in the SNF space? And what type of coverage ratios are you comfortable with on the stabilized deals that you're targeting, like all the stuff that you acquired? I mean, it's similar cap rates that are coming in or lease rates. Are we seeing the 1.4, 1.5 coverage ratios on most of these transactions?

I mean, stabilized, yeah. I think historically, you're still seeing a really wide range based on a lot of things in terms of where that portfolio or operator is in terms of recovery. Also, the geography that they're in, right? I mean, there's a huge correlation between per-bed pricing and the Medicaid rate in that state. So really depends on the portfolio. But stabilized, we're generally still underwriting to 1.4, 1.5. And the lease yields, as you get into higher, bigger-sized portfolio deals, you're going to make a trade a little bit for a little lower yield for a little higher coverage. And that's a trade we'll do a lot that works for us. You can get a little higher yield on smaller deals still, but that's kind of what we're seeing.

Okay. Cool. Great. Thanks.

Dave Sedgwick (President and CEO)

Thanks, Mike.

Operator (participant)

Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Please go ahead.

Hi, this is Robin Hanlon sitting with Juan. Just curious on the Tennessee acquisition. Could you maybe just elaborate a little bit on the background on the deal? It does usually take four to five months to take down a deal of this size. And just curious, why were you needed given that Ensign has its own sort of captive REIT and who was the seller?

Dave Sedgwick (President and CEO)

Some of those questions we've really answered as much as we can at this stage. In terms of the deal itself, yeah, it's one that we tied up and brought to these different operators, not vice versa. That's why it made sense for Ensign to do it with us as opposed to by themselves.

Got it. And is the deal excluded from guidance because it closes so late in the year? Or what kind of impact can we assume by year-end?

That's a great question. It's not included in the guidance that was provided so far. But yeah, I mean, if you just put in the type of accretion that is likely from that, looking at next year, we'll wake up on January 1st into double-digit FFO per share growth with this deal and the rest of what we've done this year. Of course, real guidance for 2025 will come in our next earnings call.

Are there any other portfolios out there where you feel like you might have an inside chance to land a deal of this size?

Yeah. When we quote our pipe, we've sort of made a point this year to give the number that we feel is very conservative, very doable, at least at an LOI stage, somewhere between LOI to tied up with a purchase agreement. And it has about 12 months for us to execute on. But we've also made a point to say that that number, because it's fairly conservative, does not include everything that we're looking at. And that's certainly true today. With that $700 million pipeline number that we gave, that does not include some larger portfolio deals that we continue to evaluate.

Okay. And on a disposition, what was the yield on them? We're collecting any rents there? And is there an expectation for rent collection on the remaining eight assets held for sale?

I'm sorry. Could you repeat the question?

Sure. Yeah. Just curious on the dispositions in the quarter. Were you collecting any rents there, and is there any rent expectation on the remaining eight?

Oh, the answer is no and no.

Thank you.

You bet.

Operator (participant)

Your next question comes from the line of Wes Golladay with Baird. Please go ahead.

Austin Wurschmidt (Senior Equity Research Analyst)

Hello, everyone. You've essentially doubled the size of the company this year, close to it. Curious how you're thinking about staffing for next year?

Dave Sedgwick (President and CEO)

I think this time last year, like I alluded to in my prepared remarks, we were looking forward to what we thought could be a historic year and made some improvements. I think I used the word recalibrated the team a bit, which included adding some people. We are still a very lean group. And I think as we sit here today looking at next year, we have a similar outlook for 2025, 2026, and beyond. And so our approach to that is to get ahead of it so that we can execute as flawlessly as possible. So we could certainly be adding incrementally to the team as we head into next year.

Wesley Golladay (Senior Research Analyst)

Okay. And just one quick follow-up. I think Bill made a comment. If the portfolio closed this year, there might be a one-timer in G&A. Do you have an approximate estimate of that?

Dave Sedgwick (President and CEO)

He's asking you.

No, I don't have an approximate estimate of it just yet.

Wesley Golladay (Senior Research Analyst)

Okay. Thank you.

Dave Sedgwick (President and CEO)

You bet.

Operator (participant)

And once again, if you would like to ask a question, simply press the star followed by the number one on your telephone keypad. Your next question comes from the line of Rich Anderson with Wedbush. Please go ahead.

Hey, thanks. Good morning out there. On the portfolio, the $500 million, what's the mechanism to get these in the hands of Ensign, PACS, and Lynx? Does that happen simultaneously with the close, or is there a period of sort of process that is going to kind of create some lag effect into 2025 in terms of getting to that stabilized coverage?

James Callister (CIO)

There will be a period of time where they'll need to get in and ramp up and get to the stabilized coverage. I mean, it's not going into the historical coverage they're looking at. But I mean, it'll take some time for them to put into place the levers they want to pull to get the coverage to their projected stabilization levels. So it'll take some time, yeah.

You can't comment on the current operator?

I mean, in terms of who it is?

Yeah.

I think we probably can. I think they've released. I mean, I think it's American Health Partners.

Excuse me. I missed that. Apologize.

American Health Partners, yeah.

Okay. Bigger picture, you guys have been growing impressively this year. Sometimes growing at that pace, we've seen it happen. Inbound problems occur. And ultimately, we've got some issues to resolve in the aftermath. I hate to be a cynic here, but how do you manage those types of risks? You know your own portfolio, but you don't necessarily know what you're buying as well. What gives you the confidence that you're not going to have some 10% of everything that you bought, this $1.4 billion, is going to require some attention in the aftermath? I wonder if you could just comment on that process?

Dave Sedgwick (President and CEO)

Yeah. I'd say that what gives us confidence is that our underwriting discipline has not changed. From day one, we have always said and lived by the mantra that we do not grow for growth's sake. And we have taken advantage of a really special window of opportunity that we're in right now. But we haven't done it in a way that in any respect deviates from our culture or our operating discipline. And so in this business, when your underwriting decision starts and ends with who is that operator, and is this the right match for this deal, you're able to take advantage of an opportunity like you're seeing us do right now.

Yeah. Let me ask you this way. We've had outsized growth in Medicare reimbursement and Medicaid in many of the states. Perhaps a recapture of inflation over the past several quarters and years. What would you say to the fact that maybe the thrill is gone here in skilled nursing and that we're going to start moving back to a more normal pace of reimbursement? And then you start saying, "Okay, well, what's the escalator? What's the reimbursement rate? And what does that do to coverage over the next few years if we get back to more like a 2%-ish type of number on both the Medicare and Medicaid front on a go-forward basis?" Maybe you could comment on where you think we are in that part of the skilled nursing cycle today. Thanks.

Yeah. Yeah. Thank you. I'd say that the benefit that we have, particularly here at CareTrust, is that we've been in the skilled nursing business for over 25 years. So we've seen ups and downs. And right now, we're in a situation where I would call the operating environment very stable, very steady. And if we can be in a steady-state environment with Medicare and Medicaid where we're back to kind of historic expectations for moderate cost-of-living type adjustments year in and year out, and we go to sort of that pre-pandemic environment, we would be thrilled. And we are thrilled with it. The excitement over here has not started waning at all because the difference is we're going back to a steady-state environment.

But the difference between this steady-state environment and the steady-state environment that we've been used to, excluding COVID for the last 25 years, is that now we're on the very beginning of a demographic wave that is inevitable. So you've got, call it 2% increases on Medicare and Medicaid going forward, but you're in an inevitable occupancy increase situation because these demographics are what they are. So as you go into next year, the year after that, 5 years out, 10 years out, we're super excited about both skilled nursing and seniors' housing.

What is your optimal rent escalator using that mentality in your history? Is it 2%? Is that the new normal, or is it something higher than that just so you don't lose credit over time?

Yeah. So almost all of our leases are done in the way that we think is optimal, and that's CPI-based. So they've got a ceiling, relatively low ceiling, and a floor of zero. And that hedges against those escalators outrunning what those increases are for Medicare and Medicaid.

Okay. Got it. Thanks very much.

Thank you.

Operator (participant)

There are no further questions at this time. I would like to turn it back to Dave Sedgwick for closing remarks.

Dave Sedgwick (President and CEO)

Well, we're just really excited and grateful for your support and interest, and hope you have a great rest of the day. Thank you.

Operator (participant)

Thank you. And this concludes today's conference call. Thank you all for participating. You may now disconnect.