Q1 2021 CareTrust REIT Inc Earnings Call

Okay.

Welcome to the characterize REIT first quarter 'twenty to 'twenty one earnings call.

Expenses 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 day management's current expectations assumptions and beliefs about per trust 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 businesses of its tenants Inc.

<unk> factors that are beyond their control such as natural disasters.

That makes sense, that's COVID-19.

Governmental actions.

The company 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 care trusted S. D. C filings for more for a more complete discussion of factors that could impact results as well as any financial or other statistical information required by U S E.

Regulation G.

Except as required by law characteristics and its affiliates do not undertake to publicly update or.

Any forward looking statements where changes arise as a result of new information.

Future events changing circumstances.

For any other reason.

During the call the company will reference non-GAAP metrics such as EBITDA.

Oh and F a D or fad and normalized EBITDA S. F O M F E D.

When viewed together with GAAP results.

The company believes these measures can provide a more complete understanding of each business line.

Cautions that they should not be relied upon to the execution exclusion of GAAP GAAP reports.

Yesterday, he characterized filed its form 10-Q on a company press release and its quarterly financial supplement each.

Each of which can be accessed all day.

The Investor Relations section of per trusses web site at Www dot characteristics REIT dotcom.

A replay of this call will also be available on the website for a limited period.

On the call. This morning are Bill Wagner, Chief Financial Officer Day.

Cedric.

President and Chief operating Officer, Michael M, Chief Investment Officer, and Eric Gillis, Vice President of portfolio management and investments.

I'll now turn the call over to Greg Stapley.

Characteristics reached chairman and CEO.

Yeah.

Thank you Alexander and good morning, everyone.

Pleased to be able to tell you the care Trust outstanding operators approved remarkably stable over its overall, thus far in this pandemic.

Of the Novartis confronted the heart test with that thing to the new realities of COVID-19 changed operating environments.

And those that have are faring well.

How long it will take for occupancy.

The hospital discharge patterns to resume is still unknown.

So is vaccination rates rise in parts of the country begin to emerge from Lockdowns, it's important to remember that the pandemics effect on the skilled nursing and seniors housing industries per port for labor.

For our core throughout the past year, we've worked hard to stay close to our tenants collect all of our rents pursue good acquisition opportunities from carefully guard our balance sheet.

Thankfully, having partner with great operators in the first place we have thus far been able to avoid some of the problems of pizza at others.

But challenges remain on the horizon, and we will continue to be vigilant.

We are pleased to report that we collected 100% of contracts or contract rents in the first quarter. We also collected 100 per sit in April and we appear to be on track to collect 100 per cent in may.

So in spite of the continuing headwinds and in light of the continuing government support we remain cautiously optimistic about our tenants prospects as occupancy begins to claim back you.

You saw this yesterday, when we increased our 2021 guidance to reflect the recent acquisitions.

To be sure. The government support has been critical but if you look at page six of our supplemental published yesterday, you will see that we begin giving you our operators EBITDAR and EBIT dorm lease coverages, both with and without shares Act funding.

Most of our skilled nursing and multi service campus tenants, who account for about 86% of our rental revenue from performing near to or better than their 2019 coverage metrics without the cares funding.

Granted these particular operators are among the upper outliers in the industry and many in fact, most other providers out there is still need that government support.

So we continue to hope that the government will see the obvious value in such things as extending the waiver of the three day qualifying stay well beyond 2021, net additional relief funding will come soon and in sufficient quantity to help those who needed to achieve the soft landing that the post acute health care system. It is predominantly elderly beneficiaries still need.

Per our part with low leverage great operator relationships plenty of liquidity and a great team here share trust remains well positioned to continue growing in pursuit of our mission of pairing great operators with meaningful opportunities to transform individual facilities and by extension the industry as a whole for the better.

So with that I'll turn it over to day for some more color on what's happening out. There then mark will jump in with recent acquisitions in the pipeline and Bill will finish off the financials, then we'll open for Q&A day.

Great. Thanks, Greg and good morning, everybody.

In Q1, our skilled nursing operators reported a much anticipated bottoming in skilled nursing occupancy.

In January we hit a pandemic are low.

But at the end of Q1, our snips reported a moderate recovery of 220 bps.

On the skilled mix front. The question has revolved around the rate of return to the pre pandemic levels. There as well now that COVID-19 cases in the nursing homes have materially declined.

At quarter end, our operators were still.

440 bps above the pre pandemic skilled mix norm.

For seniors housing occupancy and speaking relatively to what we've observed in the broader sector.

We're pleased to highlight how resilient our seniors housing operators have been so far.

COVID-19 hit them hardest at the end of last year and at the start of this year.

As with skilled nursing and seniors housing occupancy appears to have hit bottom and thus far has held steady.

I wish we could predict the slope of recovery.

But at this point, it's just too early to speculate.

Our thesis is that we will return to pre pandemic occupancy and coverage.

Question of timing will remain unresolved for some time, noting again that portfolio wide or national commentary is only marginally relevant.

Since these businesses are hyperlocal and extremely sensitive to the quality of the operators running them.

Needless to say, we expect a rebound in occupancy to pre pandemic levels to be asynchronous across the portfolio.

Next let me talk about our lease coverage as Greg noted you've seen yesterday's supplemental a continuation of our enhanced COVID-19 era disclosure.

We're in we try to be as transparent and helpful as possible.

By reporting lease coverage on an EBITDAR and EBIT darn basis.

Both excluding cares act funding and including the cares Act funds received to date and amortizing them through June of this year.

Stripping out the cares act funds, we saw overall portfolio coverage hold steady tick.

<unk> up four bps to two point 12 times.

As we evaluate the length of their runway for those operators who have needed. These funds we remain.

Constructive about the time that they have to claim their way back through this year and into next.

Lastly, and on a related note there remains roughly 24 billion in undistributed cares Act funds.

The transition to the new administration has slowed down the processing of those funds, but we understand progress is now being made.

Additionally, $8 $5 billion has been allocated for rural providers and based on preliminary reports approximately 154 of our facilities would qualify.

With that I'll pass the call over to Mark to talk about investments Mark. Thanks.

Thanks, Dave and Hello, everyone.

As Greg and David reminded us the pandemic remains at the forefront of everyones mind, right now, including potential buyers and sellers.

We've not just been playing defense.

We still feel that we have a mandate to grow and we've carefully preserved our liquidity and stayed active in the marketplace things to Joe Josh James and the entire team here at Coeur Trust, we started off 2021 by adding over $150 million very nice assets to the portfolio so far.

As most of you know in March we closed out a very nice four buildings, he CRC portfolio for $126 1 million.

The portfolio is located in extremely strong southern California, Submarkets and represents some of the best real estate, we repurchase since our start seven years ago.

More importantly, we feel like we've matched the REIT operators with these assets with pulse base, our senior living and <unk>.

And skilled health care stuff.

A few days later, we purchased 145 bed sniffs in Santa Barbara for $15 8 million with a recent place with covenant care.

And earlier this week, we announced a tack on acquisition my space base on our senior living as we acquired a 123 bed sniff here in southern California from a COVID-19, where a single asset owner, who is ready to retire.

That building sits in a market that enjoys little competition, a deep labor pool, and a staff that is easier for fresh leadership and our commitment to quality patient care.

We were very pleased that based on our sourced and brought that deal to us.

So as we sit here today, we've invested 151 7 million so far this year and moving forward as seen with the next few quarters look like in terms of actionable opportunities.

We are pleased to note that deal flow has picked up in recent weeks the volume of current opportunities seems to be tilted towards the seniors housing space.

We're cautiously optimistic that we will see more and more sniff opportunities as mom and pop operators head for the exits and larger operators per down their portfolios coming out of COVID-19.

In speaking with the brokerage community, we expected deal flow will continue to increase over the coming quarters as operator fundamentals hopefully trend back towards pre pandemic levels.

As we sit here today, our pipe has been reloaded back to our historical range of $125 million to $150 million is core.

Composition is primarily singles and doubles.

Usual, we're also investigating a couple of larger portfolios that we can treat.

Of the deal from a pipeline each one is earmarked for existing operator bench, which makes it easy to tack on and provides greater certainty for sellers.

The active pipe is predominantly sniffs with a few senior housing assets that you feel are great fits for our operators in that space.

Please remember that when we quoted price we only close deals we are actively.

Pursuing under our current underwriting standards.

And then only if we have a reasonable level of confidence that we can walk them up and close them in the relatively near term.

And now I'll turn it over to bill to discuss the financials. Thanks, Mark for the quarter normalized <unk> grew by five 5% over the prior year quarter to $34 1 million or <unk> 36 per share and normalized <unk> grew by seven 4% to $36 1 million or <unk> 38 cents per share.

During Q1 and as we've done every year, we again raised our dividend this time by 6%.

This increased our payout ratio for the quarter to 74% on M <unk> and 70% on half a day.

This is consistent with our historical pattern and as usual, we expect it to come in over the course of the year as we hopefully continue to grow the portfolio at solid spreads over our weighted average cost of capital.

Leverage continues to be at all time lows at a net debt to normalized EBITDA ratio of three seven times today.

Our net debt to enterprise value was 22, 1% as of quarter end and we achieved a fixed charge coverage ratio of seven nine times.

As Greg mentioned with the 2021 investments made to date we.

We are raising our previously released guidance by <unk> <unk>.

From both ends of the range to normalized <unk> per share of $1 46 to $1 48.

Normalized fad per share of $1 55 to $1 57.

This guidance includes all investments and dispositions made to date.

A share count of $96 1 million shares and also relies on the following assumptions.

One.

No additional investments or dispositions, nor any further debt or equity issuances this year.

Two inflation based rent escalations, which accounts for almost all of our escalators at an average of 2%.

Our total rental revenues for the year again, including only acquisitions made to date are projected at approximately $184 million, which includes less than $60000 of straight line rent.

Three interest income of approximately $2 million.

For interest expense of approximately $24 3 million.

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 million of amortization of deferred financing fees.

And five we are projecting G&A of approximately 19 million to $20 9 million. This range is up approximately $1 5 million over our previously released guidance due to certain hurdles being met relating to our short term incentive compensation program.

Our G&A projection also includes roughly 7 million of amortization of stock comp.

Our leverage and our liquidity positions remained strong year to date, we have sold approximately 740000 shares at an average price of $23.66.

Under our $500 million ATM program that we put up last year for net proceeds of approximately $17 3 million.

The outstanding balance on our $600 million revolver currently sits at $170 million and we have approximately $24 million in cash.

In addition, as Greg noted cash collections for the quarter and for April came in at 100% of contractual rent and May appears to be on track to do the same thing and with that I'll turn it back to Greg Batesville.

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

Thank you Sir at this time I would like to inform everyone in order to ask a question. Please press star one on your telephone keypad again that is star one to ask a question.

Yes.

We have your first question from Steven Valiquette with Barclays. Your line is open.

Steve Steve sorry.

Got it.

Temporary work from home crisis with.

I apologize.

Yes, congrats on the strong results good to see the guidance increases and were studying.

The coverage ratios across the largest assets everything looks pretty solid there as far as overall portfolio.

Wanted to hear more about.

Pace of occupancy recovery, it definitely seems like across the industry, what's happening much faster.

Overall, certainly versus senior housing.

I think you mentioned still some choppiness in the snip occupancy.

Recovery, maybe across some operator, just want to hear more about the.

Volatility on the sniff side. Thank you.

You alluded to.

Yes. Thanks for that question, yet, there's not a whole lot of color to give it's we're really early in.

Really just weeks away.

Some cases from.

From seeing the bottom depending on the facility in the local market that you're talking about.

So I think.

I hope that next quarter, we'll have some more color to share a little bit more of a track record of end time from from what we would call the bottom.

But like I said in my prepared remarks.

When you're talking about.

The skilled nursing sector occupancy.

It's really difficult to do that even even across the whole portfolio much less the whole country.

You really have to look at an operator by operator in some submarkets within.

The same state.

Will will recover very different paces.

And so hopefully we'll have some more color to give you next time.

Okay, and one quick follow up I mean, there's so many positive things going on and I hate to focus on a negative but is there any are there any signs maybe just in a few geographies here or there where.

And perhaps home health has taken some share from snap during the recovery phase and Thats, maybe causing some of the volatility or is that not really a trend that youre seeing just curious any high level thoughts around that as well. Thanks.

Yeah, you bet.

Our operators haven't attributed.

Occupancy issues to home health per se, it's been more of a function of how their market has been impacted by COVID-19 and how the hospitals in their markets.

Have have been impacted by it.

I'm sure that that may have something to do with it but we don't have any real insight from our operators on that front.

Got it okay alright. Thanks.

You bet.

We have your next question from Michael Carroll with RBC capital markets. Your line is open.

Yes, I wanted to talk a little bit about I guess your investment activity and I think Mark you answered this last quarter, but can you talk a little bit about how you're underwriting deals today or.

Are you expecting are you expecting operations to hit pre COVID-19 levels are or how big of a safety margin do you require on some of these transactions.

Yes.

I don't think it's too dissimilar from what we what we said last quarter I mean, you obviously need to understand what the run rate was.

Kind of pre pandemic.

From a from a margin perspective from an occupancy perspective, and you need to look at 2020 numbers to understand on the expense side, what what has ballooned.

And then really it's getting in the weeds with our operators to understand.

Specifically is not going to come back down on the expense side.

And then and then on the on the occupancy from Us.

I don't think anybody is is expecting.

To get to get back on overall occupancy, we're certainly not underwriting overall occupancy to get back to pre pandemic levels.

For a period of time so.

I think as.

As we've done historically, we always look at each asset.

And look at where the low hanging fruit is what day one changes can we make historically, we've changed operators and so we continue to stick to our knitting on on that front and see what we can see we can from on the expense side as far as top line in occupancy.

It's really.

Understanding those local markets and understanding why occupancy should get back to pre pandemic levels is it relationships with the hospital or a physician group in that particular sub market.

But I would say overall.

We're not we're not assuming that if a building historically has run maybe 90 low <unk> 90, 192% occupancy, we're not assuming that they're going to get back there in the near term. So what is coverage look like.

What it covers looks like with maybe 80 or 85% occupancy and what assumption do we make sure for skilled mix.

Okay and then.

What are you seeing on the investment opportunities aside from the smaller operators that might want to exit that business. It sounds like you had a few of those in your deal activity that you. Just recently completed I mean is this expected to grow and over time, we think that some of the sniff volumes that you are able to find this is glenn.

I guess, maybe exceed what you're doing maybe even a few years ago, just because there's a bigger opportunity set.

Yes, that's an interesting question I mean, theres, an awful lot of capital on the sideline waiting to.

Pounds I think today is as competitive on the Smith acquisition front as its ever been just due to the lack of supply.

So I think the first part of your question as well more and more mom and Pops hedge firm head from the head for the hills potentially.

Potentially.

Do the larger guys kind of pair down on assets that strategically don't fit whether that's kind of the regional super regional or even the large players with 100 plus buildings.

So I mean, we would expect to see deal flow coming from those buckets.

But at the same time too in terms of what we will be able to to grab that'd be interesting because there's there's.

And a lot of competition to two to acquire skilled nursing assets today in the <unk>.

Private very sophisticated buyers.

Oftentimes with operators and war and operating arm to there.

They're real estate company.

Are very nimble and are very competitive.

With us and so it'll be interesting to see what you know what.

What volumes will be able to do over the next couple of years, but I think Paul I think we will have our fair share of opportunities as we've seen them over the past few Greg do you have anything to add no I think that was great answers.

And then last one from me I appreciate that can.

Can you talk about some of the larger transactions that you mentioned in your prepared remarks, I mean, what type of deals are these how bigger they are how big are then it sounds like this is going to be an operating gonna be transitioning out.

Yes, I mean, I really can't comment too much on these opportunities I mean, there we're seeing.

Opportunities both on net on the sniff and Al front.

Seniors housing front.

<unk>.

So they they range in size.

We've always kind of hit on a on a chunky good sized deal.

You look back at our historical kind of investment pipeline and so we're always taking a look at the larger the larger transactions that potentially can can can help us make our year.

<unk>.

And this year is no different and so we're we're tracking a couple that are on market. A couple of that are that are not on on the market.

M.

We'll see what happens, but I think it's premature for us to comment on them on them at this point.

Okay, great. Thanks, I appreciate it.

We have your next question from Congress and birth key with bearing Baird. Your line is open.

Hey, everybody congratulations on the print.

I'm just wondering if we could get a little bit more color on maybe a backlog of surgeries for the relevant population and how referral patterns are looking now maybe versus pre pandemic levels and if theres any sense of how close we are to a normalized basis.

On any of those metrics.

Well, that's a that's a that's a great question Connor and.

Unfortunately, we don't have a ton of a real time Intel on what's happening in the hospitals, we get it from.

Being close to our operators and hearing what they are saying in terms of hospital flow.

We're paying attention to the public health systems, and hospitals, and what they're talking about and in some of those recent.

Earnings calls we took note.

Of.

Some optimism.

Is that.

Theyre expressing that there is some pent up demand that's coming back.

The elective surgeries are a little bit.

I think a misconception.

Since the vast majority.

Of the nursing home patients.

Better admitted from the hospital actually started their journey through the emergency department not necessarily conveniently scheduled elective surgery.

And to the extent that day.

<unk> or really for us.

The individual markets are still in some form of lockdown wearing masks not going out and living life as normal there's going to be a little bit of.

Our constraint on people going out and living their lives again.

Which leads to that hospital volume.

That's actually precisely what some of the hospital or health systems talked about in their in their remarks recently.

And it's something that we've always understood and tried to talk about as well.

So the key kind of lead indicator for us is going to be that.

The restrictions related to COVID-19 entirely.

Are lifted.

And people will get back to their normal lives.

It's hard to imagine that our occupancy fully recovers.

Before that happens.

Thanks, that's very helpful.

I know you guys had mentioned the skilled mix earlier on the call.

Wondering if there's any sense of what it could book like maybe at the end of this year or perhaps the end of 2022.

Nope.

[laughter] that's fair enough.

Hey, <unk>.

That's the correct answer, but we can probably give you a little more color on that I think.

As you know skilled mix has been elevated.

As is our.

Sure.

Skilled nursing operators haven't been able to to skill people in place due to the waiver of the three day qualifying stay and because COVID-19 was a.

Qualifies.

A patient for skilled.

M.

We can still we can still scale in place, which is a great thing both for residents and for our operators and for the health care system.

And the payers.

But.

COVID-19 is down precipitously thankfully.

Ross the portfolio and so we're just not seeing as many opportunities or needs to skilled patients and so we do expect that skilled mix to decline overtime as Dave said in his prepared remarks to sort of a pre pandemic norm.

Question is how fast that will happen and because that that skilled mix in some of the extra revenue that comes with it has back filled.

Some of the revenue lost due to the occupancy drop pushes foot. The match is going to be like between the occupancy recovery in the skilled mix normalization. So we're watching that really really closely to see to see what happens.

And hoping that.

Those elevated skilled revenues will continue to.

To at least mitigate some of the occupancy revenue loss that makes sense Yep yep.

If there is any sense that you are getting to the lower bound of length of stay reductions.

No I don't think I haven't heard of any pressure on length of stay I don't know Eric how about do you have a.

Have you seen something on that.

No. We do we do look at length of length of stay over time and it has stayed pretty consistent.

Over the last several months, but it is something we look at but it's been it's been fairly consistent.

Okay. That's all from me guys have a good weekend.

Got it.

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

Hi, Thanks.

Probably from Marc just to get a sense of your risk appetite right now.

For both skilled and assisted living deals.

Assuming you're you're losing out on some deals.

What do you think the underwriting is out there.

As far as growth coverage is there anything you can share on stuff that maybe you're being conservative on and maybe rightfully. So any comments on deals maybe that share that youre, losing.

I think.

We always start kind of in and around.

9% $9 per quarter on our going in.

These yields as.

As we've talked about over the years from wanting to give up a little bit of.

A little bit of yield for coverage.

So just in terms of loose.

Moving on it I think.

I think there are groups that have the ability.

To go to go into the eighth and in some some instances maybe even high sevens the private guys because.

They're spread.

Over HUD Enzo being.

In some cases, Florida four to 500 basis points. So.

So I think it's those groups that are willing to.

Shaped to kind of go down into the into the high Sevens.

We're missing out too so.

And they maybe are a little little more free in terms of why.

Sort of terms.

They need from a transactional perspective going into the door.

And in.

In terms of guarantees.

So we're wrong.

Sometimes.

On the portfolio transactions, we want to make sure that structurally it's right for us and it's right for our tenants and if it's not then.

Obviously, you've got to get the underwriting and the economics, but you also gotta get I want to make sure that the transaction structure derived from both the landlord and the Alba.

Great.

Okay. Thanks, and then probably shifting to bill just for funding the growth maybe the buildup from Mark's comments about the HUD financing with low coupons.

Can you speak to your willingness to solely tapped the debt markets right now.

It's <unk>.

Pricing and terms remain in favor of borrowers you are below your targeted leverage.

Range, maybe just think thinking through how you can fund deals with pretty low cost unsecured debt right now.

Yeah.

Rates still remain extremely low and that is an attractive source of financing for us.

Depending upon investing investment flow size is going to dictate.

A lot of how we finance right now as Mark said in his prepared remarks, a lot of the pipe is made up of singles and doubles.

And I would just take you back to our ATM, which is just a wonderful tool to match fund those singles and doubles as they come across the finish line to issue some shares under that too.

To finance, those and maybe use a little bit of the revolver.

We like where the leverage is we like it below four we think it's helped us.

So.

So that's how I kind of think of financing is for the next couple of quarters.

Okay. Thanks, a lot.

Okay.

We have your next question from Juan Sanabria with BMO capital markets. Your line is open.

Hi, good morning, Thanks for the time, just hoping you could talk a little bit about the.

Watch list.

Any changes I know things are very fluid, but.

Any color there would be appreciated if you could particularly talk about noble our premier growth.

Seniors housing operators with coverage kind of sub one times, how you feel about those two in particular.

Yes, you bet.

And as far as the watch list goes I think the comments we've made on <unk>.

In previous quarters still stands which is.

That if.

If an operator was on the watch list before the pandemic pistol R. M.

And they have largely been buoyed up by the government funding that that has helped them.

That is certainly true of of those guys.

And theres really nothing pressing or new on that front.

We stay very close to them got great relationships with all of our operators and.

And are encouraged by the liquidity that they do have in place right now in the run rate at the half.

In terms of <unk>.

Premier Noble.

A little bit of a broken record on them as well.

Yes.

They've weathered the COVID-19 storm that hit really hard at the end of last year and the beginning of this year.

Hit there.

Their portfolio the hardest in terms of.

Time.

In terms of timing.

Their occupancy is still relatively strong.

Okay.

Related to where they started the pandemic yet.

And we're seeing them start to claw back and started to climb facility by facility a little bit here and there.

Two.

So you get stronger there so.

Still too good operators, so feel really good about them and.

And.

From a fortunate that they have been.

Where they have been during this pandemic.

Okay, and then just on the reimbursement side or.

Actually I should say just the government support.

Sense of what that world distribution could mean, he said that X amount of facilities were eligible.

Do you know how much runway that could provide you guys are.

Or any other.

Fitbit to help us think about what that could mean as a benefit for for characterize.

Yes. This is Eric you know we work with some consultants that keep us up to date with with whats being said and worked on.

From a perspective of the provider relief funds.

No. We we've looked at our facilities, how many would qualify it as a large percentage of that.

We still don't know details on funding and really where theyre going to be able to use those funds, it's anticipated that it'll be possibly against their budgeted revenue, which would which would be nice.

But we hope that the that after the announcement with whats remaining in the $24 billion a day.

<unk>.

An announcement will be made after that regarding the rural funds, we stay close to that.

Largely because we know that a lot of our operators in a lot of our facilities will qualify for those funds and obviously, we believe that it will given an even more runway to have a soft landing and and get that occupancy back up to where it was pre pandemic.

Thanks, and one last one from me any thoughts on the CMS comments on PDP M and do you think there's a chance we'll see anything this.

October or more likely to defer and gather more data to have a.

More fully formed view of how.

How much above revenue neutral it ended up being so far.

Yes.

There certainly is a chance.

But what we're hearing so far.

In this open comment.

Period is that.

There's a there's a lot of comments going back to CMS about how they calculated that number and whether or not Dave.

Fully captured PDP EMS impact on net increase.

I think that there is theres going to be.

Quite a bit of.

Of comments for them to deal with there and bits on their conciliatory tone.

Even if they do go forward with it it seems like the most likely Inc.

Mentation.

Recalibration would be staged over time.

But there's still a lot to be determined on that front.

Regardless of whether it's draconian or phased over time or.

Or REIT.

<unk> in terms of that Recalibration.

As we've done the math, we think are our operators are going to be just fine, particularly because.

The operators most at risk in our portfolio that have the highest skilled mix also happen to have the highest coverage.

Thank you.

You bet.

We have your next question from Jordan Saddler with Keybanc capital markets. Your line is open.

Thank you and good morning out there.

No.

Hi, guys.

Follow up on.

First the pipeline maybe mark.

It sounded.

On one hand.

All the stuff with teed up the 125 to $1 <unk>.

More weighted towards slips.

A mix of some seniors housing.

But when I think you talked about sort of the funnel and the flow in the market and we started the other way around I think you talked to that seniors housing.

We're having a greater.

Waiting so can you maybe just clarify for us what we're seeing what you're slowing front and center in underwriting.

As Morris skilled nursing, having is that correct.

So yes, let me let me just clarify so what we're seeing in terms of deal flow from the market is more seniors housing.

Our pipeline and what we're focused on and under LOI.

LOI is more sniff heavy so despite the fact that we're seeing heavier deal flow in the seniors housing side, we're still comfortable on the sniff stuff.

Continuing to.

And see those opportunities. We're just not seeing we're just not seeing the volumes on the snow side that we that we maybe expected.

But we're still seeing those opportunities and thats what were pursuing.

Okay, and then a follow up on sort of underwriting so PDP M disc.

A discussion that we.

We're just talking about one.

AIDS.

Relatively new news.

Extent that you've been.

Due diligent saying.

Assets that are under LOI.

How is this impacting your underwriting.

What are you doing.

Well.

I think theres a couple of things I think we look at we certainly look at them the Medicare rate, you've obviously got a back out to the extent you can.

The waiver that three day qualifying stay to kind of figure out what the what the right run rate is Florida from Medicare.

I think there is.

There's going to be a little bit of margin margin of safety on that rate.

But I think what.

Whats often.

We as we look at each individual asset oftentimes.

You can look at the specific Medicare rate and each individual operator is going to be able to.

Capture that rate a little bit differently. So.

<unk> on the Mds and based on the diagnosis of each individual resident.

We sort of have an understanding of where the benchmark should be.

And then we adjust off of that so.

It's very specific to to the assets in it and it's in lockstep with our operators to understand.

Certain certain buildings are going to get a certain type of of acuity.

Not not not all Medicare patients are from the same youre going to have.

And some communities you can have patients that come in that are extremely clean is very healthy.

They come in for maybe a stroke and they don't have multiple comorbidities.

While other.

Other pockets of markets can have patients that.

Have a laundry list of diagnoses.

And they're going to look very very different on your the Mds, which is which is the basically the input information that goes into billing the Medicare patients. So so really it's.

It's getting with our operators and figuring out.

Based on the building based on the flow that they expect to get in terms of skilled patients.

And then really.

Sharpshooting and dialing in on what that rate Medicare number is in.

In terms of in terms of its kind of right sizing before.

Stepped down in PDP M. We take a look at that incentives.

Okay.

Trying to figure out what what that rate looks like fixed and cut by say, 3% or five per cent or 7% just to just to see what that does to coverage to stabilized coverage.

There's other factors too I mean, what happens with.

With Medicaid and you have states that are looking at.

<unk>.

To change their Medicaid rates you have some states that are going from.

From from fixed rate to more of a C&I base.

Acuity so there.

There's several things that go into it but I think all things being equal that's the important factor is getting getting shoulder to shoulder with the operators.

And walking through the assumptions understanding why.

What they are using for their Medicare.

What they're using it for their Medicaid daily rate.

And then.

Really looking at what the buildings doing from an existing perspective, and making sure that we can bridge.

Making sure the operator can bridge the gap and get too.

Get to where they are.

Our projected.

Okay. That's helpful. Maybe one quickly for you Bill.

On the eight P M.

Your leverage.

Three three and now it's three seven and issued 700000.

Clearly you didn't need the 700000 shares.

In order to stay within your tolerance right because youre still below four to five.

I guess here.

Adding a little bit more capacity for yourself how.

How should we think about.

Where you want to be.

Sort of short to medium term.

Be that four to five target.

He actually Wanna be under four.

We like operating under four.

Hey, Jordan, it's Greg I'll, just I'll, just tack onto that and tell you that if you look at what we just did we.

We were running like three three.

In February.

And we just spent 150 million bucks and didn't break for we really like that.

And it's already ratcheting back down to two.

The three seven range.

And so we will be ready for the next $100 million deal should that come along.

This seems to be a very very good place for us for the investors we've spoken with.

Like it.

Much.

And.

While we are not going to lower our target range of four to five times. So that we could do the three for $500 million deal. If it came along and we do have the capability to do that.

We really are.

We really do intend to stay.

Where we are in the threes.

Okay. That's helpful. Thank you guys.

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

Alright.

Thanks for taking the call.

I guess I have a question on the CPI bumps and those senior guidance you went from one point to 2.0. So I just wanted to understand a little bit better about how those CPI bumps are I guess reset within those leases are they reset quarterly maybe what they're weighing too.

Let me get a better idea of that.

Sure Hey, Dan its Phil.

CPI bumps.

Occur on the annual on the annual renewal date so.

So it's once a year some of the leases have caps on on those.

On the CPI charge.

And a floor of zero four we moved it from one in a quarter to 2% from the last from last quarter's guidance, mainly because we're seeing CPI increases north of 2% right now.

Alright.

Okay.

And then maybe a related question would be if I was an operator and I'm looking at inflation I might not want.

Keep your eye based.

So have you had any pushback from potential new tenants and deals that youre looking at net people maybe want more for fixed bump.

And the CPI bump.

Dan It's Craig no, we really have it most of our operators really like CPI as opposed to fixed months, because they feel like it tracks better with their overall expenses labor costs.

And everything else out there and it just seems to be what well you cant predict an exact number it seems to it just seems to be more predictable in terms of.

The economy and how their business is fair. So we don't get a lot of pushback on CPI bumps as long as we can give them a raise that it won't go over it as bill said most of them most of them are accounts somewhere between.

For the ensign leases, which which.

We're kind of semi arms link leases.

Chapter two and a half.

Other leases are capped at three and a half or so.

As long as they've got the cap on there and they can just go with the economy. There that's what they like actually.

Okay.

That's all I had I appreciate the time this.

You bet. Thank you. Thank you Dan.

Again, if you would like to ask a question. Please press star one on your telephone keypad.

Okay, well that looks like.

It looks like we're done thanks, everybody for being on and we hope to see at NAREIT.

Sure.

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

Okay.

Okay.

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Yeah.