Q3 2022 CareTrust REIT Inc Earnings Call

Good afternoon, and welcome to care Trust REIT third quarter 2022 earnings conference call.

All participants are in a listen only mode. After the speaker's presentation, we will conduct a question and answer session.

Asked a question you'll need to press star one on your telephone keypad to withdraw your question. Please press star one again.

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Lauren Beale characterize senior Vice President and controller. Please go ahead Ms deal.

Thank you and welcome to the care Trust REIT third quarter 2022 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 that I would characterize the business and the environment in which it operates these statements may include projections.

Adding 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 business needs of its tenants, including factors that are beyond their control such as natural disasters pandemics, such as COVID-19 and government elections.

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 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 characterize REIT and its affiliates do not undertake to publicly update or revise any forward looking statements where changes arise as a result of new information future events changing circumstances or for any other reason.

During the call the company will reference non-GAAP metrics, such as EBITDA F. F O S. A D or fad and normalized EBITDA S. F O N F. A D wave.

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.

Yesterday characterize 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 care Trust website at Www Dot care Trust REIT Dot com a.

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, Mark Lamb, Chief Investment Officer, James Hollister, Executive Vice President and myself wanting deal.

Now I'll turn the call over to James that we characterize <unk>, President and CEO , Dave. Thank you Lauren and good morning, everyone.

First we'd like to excuse our CFO Bill Wagner from today's call Bill's brother, very recently passed away.

And Bill is spending time with family this week and on behalf of Bill I'd like to thank you.

For the many condolences and concern that has been expressed.

We love Bill and pray for him and his family during this time.

Now if I can shift gears zooming out a bit to look at the big picture today's broader economic conditions bring both opportunities and challenges for our business historically health care has been a hedge against recessionary pressures as demand for services is unaffected.

Labor markets tend to loosen.

Drilling down further to our market.

Really levered buyers have been very active in our space for several years and the tight market. The type that market today has caused difficulties for those buyers.

And therefore slowed some of our pending dispositions, but the flip side is that the rising rates are clearly tipping the scales in our favor on the acquisitions front.

We expect to continue to see an uptick in deals across our desk in the coming months.

In October we hosted our operator conference where.

And we collectively address topics like overcoming the tight labor market purchasing reimbursement.

The administration's policy proposals and more.

We came away from that conference energized and cautiously optimistic about returning to growth in 2023 with who we believe are among the most elite operators in the sector.

Each operator is unique.

Most are eager to grow with us well some are very still.

It's still very much finding their footing as they continue to manage through historically tough operating conditions.

Deeply grateful for each of them and their tireless work to improve the lives of their staff residents patients and the communities they serve.

We're also encouraged by the overall portfolio strength as we head into a new year that will likely see the eventual termination of the public health emergency.

In our supplemental we are reporting lease coverage on an adjusted basis, excluding assets held for sale.

That coverage through June is just north of two times for EBIT Dar.

258 times for EBITDAR.

We collected 93, 4% of rents inclusive of deposit supply in the quarter.

92, 5%, excluding those deposits.

And we're currently in October we collected 95, 6% inclusive of deposit supplied and $92 seven exclusive of deposits.

I'll conclude by acknowledging the great work done by the team here to close on the sale of the trio skilled nursing portfolio in the face of several headwinds getting that deal across the finish line in September was a top priority for the company and our team did a great job.

Even after 30 months of a pandemic this year's bear market and repositioning work.

We have produced a five year total shareholder return of 22, 2% through Q3.

As we conclude the portfolio optimization work in the coming months, we will be poised to take advantage of increasing opportunities to grow as you've become accustomed to with care Trust.

With that I'll turn it over to James to update you on the portfolio and the quarter.

Thanks, Dave as Dave mentioned, we were very pleased to have closed during the quarter on the sale of seven facilities in Ohio at a purchase price of $52 million. The sale included six skilled nursing facilities and one multi service campus totaling approximately 600 skilled nursing beds and 100 seniors housing units.

As we sit here today, we have several dispositions progressing towards closing with target closing dates in the next couple of months.

The majority of properties currently classified as held for sale are under signed purchase agreements and in various stages of due diligence with the buyers. We are pursuing parallel paths of selling a re tenant in several of the other properties held for sale as we weigh the alternatives for these properties. The common objective remains the same to <unk>.

The portfolio moving forward and efficiently allocate capital for the long term.

Outside of the assets held for sale, we have entered into leases to reposition to of the seniors housing facilities to behavioral health and are entering into a lease to re tenant to other seniors housing facilities with a tenant that is a new relationship for us.

While we had expected to complete most of the dispositions by year end the dramatically alter that market has impacted many of our buyers as interest rates have risen we've seen many lenders continuing they're moved to the sidelines and as they consider industry headwinds and a looming recession with.

With lenders withdrawing the process for selling a leveraged buyers has slowed significantly.

Nevertheless, we continue to see legitimate interest in our proposed dispositions and we will continue to provide updates to you as deals further solidify and progress.

Also for the portfolio in Q3, we closed two real estate secured portfolio loans.

August we closed on a $22 3 million Bp's loan secured by five California skilled nursing facilities the loan as a sofa base rate with a floor of eight 5% and in September we provided a $24 $9 million bp's loans secured by four Georgia skilled nursing facilities.

Loan is fixed to us at a 9% rate.

Those recent transactions, bringing our 2022 year to date investment total to just under a $170 million at an average yield of approximately 9%.

With that I'll turn it over to Mark to address the pipeline, thanks, James and good.

Good morning, everyone.

Looking to the market, we see increased interest rates, particularly from bridge lenders, who were widening there spreads are tightening their underwriting standards, specifically increased debt yields and lower LTV and the LTC ratios, which we believe these changes have been the drivers of an uptick in deal flow for us.

Brokers and investment sales professionals are now commonly advising sellers to take certainty of close over maximizing sales proceeds, giving an advantage back to the well capitalized buyers like us who do not depend on bank, our debt fund financing to close transactions.

We're seeing more actionable acquisition opportunities in markets that we and our operators are looking to grow and unfortunately, yes, predictably sellers still believe they're going to achieve peak pricing that they could've received in 2021 in early 2022 and it remains to be seen how long this period of price discovery last.

The pricing.

The environment is dynamic and we expect to see valuations come down further over the coming months as those operators either having to exit the space or choosing to exit we will have to transact at prices that are more reflective of historical cap rates and price per bed values.

We continue to work closely with our current operators and with some new operators, we have long admired to underwrite and structure each of our acquisition opportunities to ensure the investment pencils for us and our tenants.

Turning to the pipe and currently sits in the $100 million to $125 million range. The pipe is primarily made up of skilled nursing and behavioral health assets at this time.

We are seeing our standard one off opportunities and also looking at some medium to large sized portfolios that may be split up amongst a few of our operators and in some cases can be used to allow us to launch some new operators as we've probably done in the past and with that I'll turn it over to Warren to discuss the financials.

Thanks Mark.

For the quarter normalized <unk> decreased one 7% over the prior year quarter to $36 1 million and normalized <unk> decreased by two 6% to $38 million.

On a per share basis normalized <unk> decreased to 10, 8% to 37 per share and normalized <unk> also decreased to penny to 39 cents per share.

Rental income for the quarter was $47 million compared to $46 8 million in Q2.

The increase of 200000 is due to the following two items.

One an increase from CPI bumps of 394000 offset by a decrease of 145000 from cash collected from tenants who were on a cash basis of accounting.

Are you a decrease in reimbursed property expenses of 36000.

Interest income was up $2 5 million due mostly to the loans, we closed at the end of last quarter.

Interest expense was up $2 1 million from Q2 due to a higher LIBOR rate, which accounted for most of the increase totaling $1 6 million and higher borrowings under our revolver, which made up the remaining 486000.

During the quarter, we took additional impairment of $12 3 million on assets held for sale.

Property operating expenses were $3 8 million for the quarter, primarily related to the sale of the facilities in Ohio totaling $3 3 million with the balance of 500000 related to properties held for sale.

G&A expense was up 181000 from Q2 due to compensation related items of 302000 offset by other corporate related items of 121000.

I'm still expecting this year's G&A to be around $20 million.

Lastly, we recognized a $4 7 million unrealized loss on our loan portfolio.

We have elected to account for our loans using the fair value option.

As interest rates have risen since replaced these investments at fair value has declined.

I would like to stress that this isn't unrealized loss and does not indicate that there will be any issue with collectability of either interest or principal.

Cash collections for the quarter came in at 93, 4% of contractual rents and includes the application of 424000 of security deposits without the application of the security deposit cash collections with 92, 5% of contractual cash rent.

October we collected 95, 6% of contractual rents due from our operators, but that percentage includes cash deposits.

Excluding those cash deposits contractual cash rents collected was 92, 7%.

We expect November collections to be similar to what October was with zero dollars coming from the application of security deposits.

Our liquidity remains extremely strong with approximately $19 million in cash and $405 million available under our revolver.

Leverage also continued to be strong with a net debt to normalized EBITDA ratio of four two times well within our stated range of four to five times.

Our net debt to enterprise value was 36% at quarter end and we achieved a fixed charge coverage ratio of five nine times.

And with that I'll turn it back to Dave.

Great. We hope our report has been helpful and thank you for your continued support and now happy to answer your questions.

Thank you if you'd like to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press star one again, well pause for just a moment to compile the Q&A roster.

Our first question comes from Jonathan Hughes from Raymond James. Please go ahead. Your line is open.

Hey, good afternoon, or good morning out there.

On the seniors housing disposition dispositions in progress can you just remind us how much of those are paying or not paying rent.

Have we announced a breakdown of that in the past.

Don't think we have Jonathan okay.

So.

We will have to address that probably on a future call, yes fair enough.

Alright, well I guess moving to the portfolio then could you just talk about that you can give us maybe an update on.

Covenant care base Shire, and the Aspen portfolios, where EBITDAR coverage has either improved or stabilized, but it is below one times and are those all skilled nursing portfolios, maybe their locations and just any.

Any update or outlook on them continuing to pay rent.

Yeah, you bet.

So.

Take our base Shire, and asking kind of together those guys.

Our top 10, although we don't have a lot of buildings with them.

We they've made up a.

The Big acquisition that we did last year.

Those prime.

Markets here in California Big campuses.

That there was some turnaround work that needed to be done when we acquired them.

And and.

And it was in the midst of the pandemic and so we expected a bit of a ramp in coverage with them. What we're looking at here through June of last year.

As.

Inclusive of a lot of those early months.

Of last year, and I would say that as we sit here today things are trending a lot better.

Particularly.

Aston.

<unk> is making some great changes at one of those buildings that has been a little bit slower than the other and.

And base Shire.

We expect to predict to continue to report increasing coverage on them.

Aspen has a nice size organization beyond the two assets that we have with them.

Our very strong corporate credit and.

And B shares.

Like they are delivering already a little bit ahead of schedule on their turnaround plans. There. So with those two we don't have any concerns about default.

They're going to continue to perform very well going into next year Covenant care has been through a change in.

Management to new CEO started there in June .

And we're very close to those guys as well and are pleased to see the moves that they're making.

And we're expecting that coverage to increase in coming quarters, and we don't expect.

Any problems with rent.

Okay.

That's very helpful. Thank you.

And then I was hoping you could just kind of talk about your views on transitions are re tenanted properties and and the discussion between you and an operator obviously.

Each situation of negotiation is a little different but when those inevitably arise as they they do within skilled nursing and seniors housing you know how do you way characterize deck care Trust economics, and preservation of value versus bringing another operator and setting them up for success.

Okay.

Well Youre right in your question you stated a key point, which is at each deal is pretty unique.

It depends on the existing relationship and the level of confidence that we have in the in the operator who's running the portfolio.

At the end of the day, the math is simple enough that even I can do it which is.

Long term what's the.

What's the strategy Thats going to preserve the most value for care Trust while also.

Being a sustainable win for that operator.

So.

There isn't really a cookie cutter.

Answer we look at when there is a.

When Theres a question on the table about an operator going sideways, we really look at all of the options from disposition to re tenant team.

Cutting rent and keeping the operator.

To repurposing.

And.

And again, a lot depends on the existing relationship and confidence we have in in the current operator.

Whatever is going to lead to the greatest preservation of value going forward is as.

Going to be the the.

The strategy we pursue.

Okay.

And one more just for me for me the all other tenants bucket, that's about 10% of rents.

EBITDAR coverage there is above 111 times, which is great to see and I recall.

Last quarter, there was an operator in there that actually had negative coverage that dragged it down can you maybe give us an update on that coverage for that negative operator, and then coverage for the rest in that bucket as as you did last quarter. Thanks sure Yeah. Thanks, Jonathan.

Yeah, we stay very close to that operator, thats not in our top 10, but they're big enough to have a pretty big impact to that number.

<unk>.

Theres really no change since last quarter.

They.

If you exclude them from the number then that 111 times coverage goes to 194.

And total portfolio coverage goes to 211.

The current contractual rent that through the through Q3, they're current on.

Far exceeds what we would likely achieve from either re tenant teen or a recycling approach.

And so we continue to be patient with them as they continue to pay rent and make progress on their turnaround plan.

Okay.

And maybe what's the backing behind them. That's my final question. Thank you.

Yeah.

They are.

They have a group of investors.

That that continued to fund this turnaround strategy.

Okay, Alright appreciate it Tim.

Alright, Thanks, Jonathan.

Our next question comes from Juan Sanabria from BMO Capital markets. Please go ahead. Your line is open.

Thanks for the time.

Just hoping you could kind of reframe, where we are in.

And the repositioning either through asset sales or re challenging some assets. It seems like you've done two one going for.

And if any of the asset sales.

Either falling out of that pool or kind of what's the latest status on.

Dollar value or number of assets that you expect to sell or transition just to give us a bit more bread crumbs from a modeling perspective.

Yes.

It's pretty fluid as you've picked up on.

About half of the assets that are held for sale are right now under.

Purchase sale agreement that have dates either year end or little bit past that to close.

And then the other half are we are a little bit more fluid than that as we are.

Going down the parallel paths of.

Looking at re tenant teen versus selling.

Don't think we've given any.

Guidance on eventual value that we expect to get from from that particularly because it's a moving target.

As things fall in an and.

And the fallout of that those buckets.

So that's that's where we're at.

Okay then.

On the pipeline.

Curious on the yields.

You should expect for <unk>.

100, 125 correctly those numbers from our earnings.

Took capacity out there.

And I don't think that included sniffs.

Correct me, if I'm wrong, but I thought that was seniors housing in behavioral.

And if it doesn't work or do you see cap rates today really across the three major food groups.

Okay.

Hey, Juan it's Mark I would say I would say the yield.

Honestly moved up so.

Starting in the tens.

Mid teens at this point for skilled nursing.

On the behavioral side, it's somewhere between nine and 10, and then EMEA assistance side.

I would say kind of.

Mid to low nines.

We're obviously not looking at a lot of seniors housing at this point.

I think in my prepared remarks, I said skilled nursing and behavioral which is what we're focused on right now in the composition of the pipeline is made up predominantly of those of those two groups.

So that.

That's kind of where pricing is as we sit here today.

Okay, just one last one for me anything.

Incremental on the balance sheet in terms of bringing down the floating exposure.

You could do or wanted to you were at this point is kind of trillium.

With where rates have moved.

Yes, Hi, this is Lauren.

About half of our debt is floating rate debt. However, when we received the expected proceeds from the sale of the properties that are being marketed that percentage is going to come down.

We have looked at swap into fixed rate on our term loan, but we don't like those rates when we compare it to the yield curve. So while it may be a bit bumpy for the next six months or so with regards to rate exposure, we feel comfortable with where we're at.

Very much good luck with everybody and condolences too.

Thank you Brian .

Our next question comes from Dave Rodgers from Baird. Please go ahead. Your line is open.

Yes, good morning out there I was wondering if you could talk a little bit more about the discussions that you've been having with the potential buyers.

More details on or have you only worked with kind of one buyer on each set of assets or if you had to have you been re traded if you had to go find more buyers to close and then maybe just a second thought on that is given the tough financing market. Given your floating rate exposure have you thought about more of a seller financing on some of these transactions too to get them closed and maybe.

<unk> had some of that floating rate exposure with with floating rate loans out the other side.

Yes, I don't think I would probably tell you anything you wouldn't expect to hear on those discussions with potential buyers.

Given how much the world has changed.

Since we kicked off this process back in Q1.

It's just become tougher for them as lenders have kind of.

Tightened up their requirements.

And so.

It's not surprising.

To us or to anybody I think that.

Potential buyers are coming back with extend extensions for diligence or different asks as they have.

So that's that's kind of par for the course, it's the environment that we're in we're not terribly concerned about it because we can always.

Continue on and re tenant or do whatever is going to preserve the most value.

The second part of that that I guess.

Any seller financing on the assets anything you would consider along those lines.

To get more assets moved.

Yes, we will provide that if needed.

To some degree I mean, we don't want to get.

Two two heavy into that but we will be flexible to get stuff done that we need to get done.

Okay.

And then maybe two clean up questions for me.

One you got the Ohio sale done a little bit earlier.

Which was good to see did that just start earlier and.

And what was the yield on that or what would be the impact to you guys on that outside of the cash and then the second question on the financing side. The deposits you said I think in November you don't expect to use any deposits or at least it's not in kind of the number.

What are you what are the deposits do you have left remaining from the tenants that haven't paid or are paying fully.

No we haven't.

Reported the size of our deposits on hand.

Don't have that Andy and that's not something we've disclosed in the past.

With regards to the trio portfolio.

We're not paying rent at all this year.

And so the.

The immediate impact is paying down the line and then as we redeploy that will we.

You will see an uptick.

Great. Thanks, Dave.

Thank you.

Our next question comes from Michael Carroll from RBC Capital markets. Please go ahead. Your line is open.

Yes.

Michael Your line is open.

Alright.

I wanted to discuss the transaction market and see the differences that you're seeing on the skilled nursing facility side in the seniors housing side and what we've heard is that the private market valuations first next is actually holding up fairly well, while there is probably some more concerns on the seniors housing side I mean do you agree with that.

That overall sentiment.

Hey, Michael It's Marc I would say I agree with the second part of that I think I think certainly we are seeing.

We don't see a ton of class a senior housing. So so what we're seeing is a little more kind of middle market and that certainly seems to be in a bit of a freefall I think on the private market skilled nursing valuation side.

I think that's actually a lot has changed in the last couple of weeks and kind of continues to move in our favor more and more every day. So I think.

Those those prices are starting to come down.

Certainly there is debt available.

But it's not attractive enough for that.

The valuations to stay prompt the other night and I think really we're starting to we're seeing stuff come down almost daily.

And then new expectations around either brokers or sellers.

Mark how far away is I guess sniff valuations versus where care trusts would be comfortable buying some of those properties I know over the past few years, it's been well above your expectations I mean, how much closer as are those valuations compared to what you are willing to execute on.

I think I think it.

It's going to be it's going to be asset dependent as it always has with us and we really look for low hanging fruit on a specific asset.

Over the last couple of years, we've been accustomed to buying buying buildings and assets that maybe have little to no cash flow, but had enough low hanging fruit and day, one changes for ancillary fees or insurance expenses.

Two.

To basically grow lease coverage fairly quickly within the first 90 days so.

I think I think it has a ways to come down.

Certain states will probably stay propped up I think the end of the public health emergency I think will be the end of.

And in line for a lot of operators I would expect at some point mid.

Mid next year to see call it.

More distress.

We're seeing a healthy amount of.

Of portfolios on the market right now that are losing significant dollars and.

You know look if bridge lenders are.

Somewhere in the seven states.

HUD today is probably six five to six and three quarters all in the <unk>.

<unk> is not there and so.

You can't go high leverage on.

From a bridge lending perspective so.

Really rights or <unk>.

And a pretty good position to kind of.

Pick and choose what works for us and for our operator, So I think we're probably my Crystal ball is probably six to 12 months away from seeing.

Pricing come down significantly.

To wear.

Call it.

Asset economics kind of fit.

With.

With the values.

But that doesn't mean that we will be.

Be acquisitive in.

And look for specific assets that fit our operators and their geographies, where they have the best human capital and leadership to turn those assets.

And how aggressive are you willing to be pursuing acquisitions I'm, assuming a lot of these assets there that are on the market our turnaround stories.

I know that historically you care Trust has bought a lot of assets and <unk> transitioned out the operators.

I mean, how aggressive are you willing to do that and are you willing to underwrite some.

Pretty big upticks in EBITDAR to make those deals work.

I'll take that one this is Dave I think we will be.

Aggressive.

I think that theres going to be there's going to be so many opportunities.

In the coming months.

And operators that.

Alright facilities that have just lost their way, but as you bring in a new operator fresh leadership Ken.

Ken can really move the needle.

And we can either watch that or participate in it and I think we have.

Really capable operators, who had a history of adding value in pulling the appropriate levers to both quality care.

And.

The employees and the culture and that translates down to the financial performance that you could see us doing some deals next year that might have a ramp.

For our operators for rent.

And to give them some time to turn those buildings around.

But again like Mark said, we just.

Take each deal.

Separately.

Our underwrite it to what it can do.

Great and then just last one for me are you mostly focused on skilled nursing facility assets right now I mean would you pursue seniors housing properties too.

Yes, philosophically or strategically we haven't written off seniors housing.

We're simply seeing more skilled nursing today than we have in the past.

And our bench candidly of operators is just deeper on the skilled nursing side today.

And.

So we're we're open for business on skilled and seniors and behavioral health.

Okay, great. Thanks.

Thanks, Mike.

As a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.

Our next question comes from Steven Valiquette from Barclays. Please go ahead. Your line is open.

Great. Thanks next for taking the question.

So this is kind of an age old question I guess, but just among your top 10 operators and probably some of the other ones as well there are.

Some where the rent coverage is one point out on an EBIT dollar basis, but still above one point now on EBITDAR.

It's always a little bit murky on the fees in between those two ratios and what is being spent on how much is truly cash versus noncash et cetera, but maybe just remind us which set of ratios you are more focused on.

And while you talked about some of the individual operators that are sub one point or are there any where youre not too worried about the type of being able to pay rent because the EBIT darn coverage is still one point I'll, even though EBITDA is sub one just kind of wanted to dive in that that component of the.

You have the ability to pay rent and just see how the nuances on the differences in the coverage ratios on some of these tenants.

Yes. Thank you.

So the difference for us as we apply.

The standard 5% management fee to come to to go from EBITDAR to EBITDAR.

So that everybody has.

Viewed.

The same standard lens.

To your question about concerned about paying rent.

Be clear that we really do not have any concerns about.

About rent payments from our top 10 tenants.

In spite of a few of them being under one times.

Yes, the management fee.

Can help but in a bigger sense.

The larger corporate credit is there the momentum.

Is also there.

Dialog and open transparent relationships that we have with them.

Give us great confidence that they will continue to.

To improve that coverage to north of one times in short order.

But generally that 5% management fee.

Is not completely.

Right.

Used for back office corporate services and it does produce some extra cash flow for those guys. Every operator is a little bit different about how much of that 5% is actually used versus providing some free cash flow to them. So it is hard to.

To really extrapolate.

Okay. That's helpful. I appreciate the color. Thanks.

Got it.

Our last question comes from Austin <unk> from Keybanc capital markets. Please go ahead. Your line is open.

Just wanted to touch on sort of the updated timeline for completing the portfolio optimization process and is that still on track for yearend or could we see that bleed into 2023.

Yeah, like we said.

On the call and in the script.

We have about half of it that has.

<unk> signed PSA is.

Most of that has target closes for the end of this year, but given the market that we're in it's pretty fluid.

And could see some of that pushing to next year.

Would you guys expect by fourth quarter results to be able to provide 2023 <unk> guidance.

Hope, so, but we'll have to determine it depending on the timing of these dispositions.

Okay, and then just wanted to touch it looked like one of the assets fell out of the pool of Repurposing opportunities. This quarter I think it went from three down to two.

Could you just kind of give additional detail on.

What drove that.

Yes during the diligence process for licensure for the behavioral health.

Property in that particular market.

The timeline to repurpose that was determined to be a lot longer than than our operator had originally expected.

So that caused us to revisit the issue and.

We mutually agreed that would probably make more sense for us to just re tenant that as opposed to.

Agreed to a much longer timeline before receiving rent on that property.

Understood and then Dave on your comments in the release around occupancy trends.

<unk> updated for specifically for the third quarter and should we should that signal coverage levels have bottomed.

Or could expense headwinds continue to offset some of those occupancy gains.

Yes, so the occupancy issue the third quarter, just remember that when we give occupancy numbers that are that real time.

They can fluctuate a little bit as the actual financials come in.

And going forward as it relates to coverage there is a lot of variables in play right now from skilled mix to overall occupancy.

What the labor market looks like as the recession takes hold so it's pretty tough to look into crystal ball right now.

But hopefully we'll have some more clarity.

On that in the next quarter.

And then just last one for me, we've kind of covered a lot on the acquisition pipeline, but I'm just curious if those new deals that youre evaluating like do you plan to kind of dig in further I guess in those top five states that you are concentrated in our R. R.

Are these broader opportunities where you could gain scale within some of those states, where you have much less exposure.

Yes, we're open to grow wherever we have an operator that we'd like to partner with there are certainly going to be.

Exciting opportunities, we think to expand existing relationships and existing geographies, but we're also nurturing several relationships with new operators that we hope to.

To enter into agreements with in the coming.

In the coming year.

Got it thanks for the time.

You bet.

And we have another question from tail Okusanya from Credit Suisse. Please go ahead. Your line is open.

Hi, yes, good afternoon, everyone.

A question specifically around ensign as a top tenant.

Again, they've kind of enter this relationship with with.

With Sabra and it's kind of interesting because.

Not that long ago. They were just kind of talking purely about the captive REIT. So I am just kind of curious again, when you kind of see what's happening with Sabra does that change any way.

How do you kind of think about your relationship with Ensign does that make you and I feel like I'm, even more opportunities to work with them going forward.

Rather than less.

No.

I think.

I don't think that there announced deal with sabra effects our relationship in any capacity in any way, we've got a great relationship with those guys and.

And our big fans of the.

The quality of their work.

And like we expanded our relationship with them last year. If there is opportunities to do that going forward, we absolutely will.

Okay.

Clarify like I, just thought they were kind of going towards building their own retail was kind of interesting for them to kind of decide to be a comment again for a bunch of assets that's kind of what I was curious about.

Yeah, No I think Dave.

They've always.

We have always prioritized acquiring real estate.

Before the characterize spinoff and since the characteristic than off.

And I think they would love to do that still.

But even with that preference.

If you look back they have done a lot of of leases at the same time, so I think.

The thing about Ensign is they are very disciplined in their growth.

And the opportunities that they that they pursue whether it and they can they found the ability to be disciplined.

Rover's, both through real estate and leases.

Got you. Okay. That's helpful. And then David just indulge me again your commentary generally todays founded cautiously optimistic which is great to hear.

But it also but you also kind of <unk>.

Hedging that a little bit if I may use those words with environment is still somewhat uncertain.

Yes.

Kind of data points, specifically are you looking for over the next one.

One to two quarters to truly feel like things have turned.

I'd say that we want to we really want to see.

Agency third party temporary agency usage come down in a meaningful way in those facilities.

<unk>.

The best I'd say sign of stability for an operator is to have essentially no third party temporary agency staffing.

Not only is it expenses, but it.

As a detriment to the quality of care and culture within any facility.

So while those remain high it's going to be a little bit of a constraint on both occupancy growth and just to return to.

Kind of more of a pre pandemic field.

Gotcha. Thank you.

You bet.

We have no further questions I would like to turn the call back over to <unk> CEO , Dave Sedgwick for closing remarks.

Well. Thank you again for your continued support we will see some of you at NAREIT next week.

If not you have any questions you know where to find us take care.

Okay.

This concludes today's conference call. Thank you for your participation you may now disconnect.

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