Q2 2024 CareTrust REIT Inc Earnings Call
Operator: Thank you for standing by. My name is Mandeep, and I'll be your operator today. At this time, I'd like to welcome everyone to the CareTrust REIT second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.
Mandeep: Thank you for standing by. My name is Mandeep and I'll be your operator today. At this time, I'd like to welcome everyone to the CareTrust REIT Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
Operator: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Lauren Beale, SVP Controller. You may begin.
Mandeep: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you.
Mandeep: I would now like to turn the call over to Lauren Beale, SVP Controller. You may begin.
Lauren Beale: Thank you, and welcome to CareTrust REIT's second 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'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.
Lauren Beale: Thank you, and welcome to CareTrust REIT's second quarter 2024 earnings call.
Lauren Beale: 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.
Speaker Change: These forward-looking statements are subject to risks and uncertainties that could cause actual results to materially differ from our expectations.
Speaker Change: 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.
Lauren Beale: During the call, the company will reference non-GAAP metrics such as EBITDA, FFO, and FAD or FAD. A reconciliation of these measures to the most comparable GAAP financial measures is available in our earnings press release and Q2 2024 non-GAAP reconciliation, which are available on the Investor Relations section of CareTrust's website at www.caretrustread.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 Collister, Chief Investment Officer. I'll now turn the call over to Dave Sedgwick, CareTrust REITs President and CEO. Dave?
Speaker Change: During the call, the company will reference non-GAP metrics, such as EBITDA, FFO, and FAD, or FAD.
Speaker Change: A reconciliation of these measures to the most comparable GAAP financial measures is available in our Earnings Press Release and Q2 2024 non-GAAP Reconciliation that are available on the Investor Relations section of CareTrust's website at www.caretrustread.com.
Speaker Change: A replay of this call will also be available on the website for a limited period.
Speaker Change: On the call this morning are Dave Sedgwick, President and Chief Executive Officer, Bill Wagner, Chief Financial Officer, and James Collister, Chief Investment Officer.
Dave Sedgwick: I'll now turn the call over to Dave Sedgwick, CareTrust REITs President and CEO . Dave? Well, hello, everybody, and thank you for joining us. I'm very pleased with the strong first half of the year.
David Sedgwick: Well, hello, everybody, and thank you for joining us. I'm very pleased with the strong first half of the year, particularly as we celebrated our 10-year anniversary this summer with some record performances. I'll speak first about our year-to-date results and outlook for the second half of the year. James will cover the investment landscape, and Bill will review the quarter. Thus far in 2024, we have delivered the following record-setting investments of approximately $765 million at an average yield of 9.5% and counting; equity issuance of approximately 23.7 million shares for gross proceeds of $580 million, year-over-year market cap growth of 84%, and an enterprise value of $4 billion for the first time.
Dave Sedgwick: particularly as we celebrated our 10-year anniversary this summer with some record performance.
Speaker Change: I'll speak first to our year-to-date results and outlook for the second half of the year. James will cover the investment landscape and Bill will review the quarter.
Speaker Change: Thus far in 2024, we have delivered the following.
James Collister: Record-setting investments of approximately 765 million dollars at an average yield of 9.5 percent and counting.
James Collister: Equity issuance of approximately 23.7 million shares for gross proceeds of $580 million.
James Collister: Year-over-year market cap growth of 84%.
James Collister: and an enterprise value of $4 billion for the first time.
David Sedgwick: What's just as remarkable as the growth this year is the genuine sense that the momentum is actually building. Funding this growth with equity has not only been more accretive than it would have been with debt this year, but it has continued to set up the company for supercharged growth for the foreseeable future. The first half performance is a result of moves made in recent years to our balance sheet, our team, and strategic investments and relationships that, taken together, have all positioned us to capitalize on opportunities as crosswinds have turned into tailwinds.
James Collister: What's just as remarkable as the growth this year is the genuine sense that the momentum is actually building.
James Collister: Funding this growth with equity has not only been more accretive than it would have been with the debt this year, but it has continued to set up the company for supercharged growth for the foreseeable future.
James Collister: The first half performance is a result of moves made in recent years to our balance sheet, our team, and strategic investments and relationships that taken together have all positioned us to capitalize on opportunities as cross winds have turned into tailwinds.
David Sedgwick: In our June Investor Deck, I wrote about our Articles of Faith. First, long-term thinking. The price we pay and the operator we choose is intended to result in long-term quality care and, as a result, value creation. We do not live for the quarter. Second, operator first.
James Collister: In our June Investor Deck, I wrote about our articles of faith, first, that long-term thinking, the price we pay and the operator we choose, is intended to result in long-term quality care and as a result, value creation. We do not live for the quarter.
David Sedgwick: The most critical decision for any investment is matching the right operator with the right opportunity. The third scale will come. We're not interested in growth for growth's sake. Each investment should stand on its own, and Forreth, a conservative balance sheet.
James Collister: Second, operator first. The most critical decision for any investment is matching the right operator with the right opportunity.
James Collister: Third, scale will come. We're not interested in growth for growth's sake. Each investment should stand on its own.
David Sedgwick: We believe in keeping leverage low to both protect against an uncertain macro environment and to capitalize on windows of opportunity to grow in a significant way. We may take modest short-term dilution when the pipeline justifies it. We have relied on these principles from day one, regardless of the direction of the wind, and we will continue to run the business in this way going forward. Now turning to the portfolio, you will see that the supplemental lease coverage continues to show tremendous strength and security overall.
James Collister: And fourth, a conservative balance sheet. We believe in keeping leverage low to both protect against an uncertain macro environment and to capitalize on windows of opportunity to grow in a significant way. We may take modest short-term dilution when the pipeline justifies it.
James Collister: We have relied on these principles from day one, regardless of the direction of the wind, and we will continue to run the business in this way going forward.
James Collister: Now turning to the portfolio, you will see in the supplemental lease coverage continues to show tremendous strength and security overall.
David Sedgwick: Property Level EBITDAR with a 5% management fee, and EBITDARM coverage was reported at 2.17 times and 2.78 times, respectively. The scale of underperforming operators remains relatively small and manageable. We have a couple of transitions underway that will result in higher revenues next year from those properties than this year, and we've decided to sell a handful of chronically underperforming assets. The Midwest SNF portfolio that has been held for sale remains in a held for sale status as of today.
James Collister: Property level EBITDAR with a 5% management fee and EBITDARM coverage was reported at 2.17 times
James Collister: and 2.78 times respectively.
James Collister: The scale of underperforming operators remains relatively small and manageable.
James Collister: We have a couple transitions underway that will result in higher revenues next year from those properties than this year.
James Collister: And we've decided to sell a handful of chronic underperforming assets.
James Collister: The Midwest SNF portfolio that has been held for sale remains in held-for-sale status as of today.
David Sedgwick: These transitions and dispositions, taken together, will effectively deal with all of the properties that have underpaid this year. With respect to occupancy, I'm pleased to report that in Q2, we finally reached and then surpassed the pre-pandemic skilled nursing occupancy levels. SkilledMix was down a little bit year over year, but we appear to be settling in at a new normal that is quite a bit higher than pre-pandemic SkilledMix, about 330 bps higher.
James Collister: These transitions and dispositions taken together will effectively deal with all of the properties that have underpaid this year.
James Collister: With respect to occupancy, I'm pleased to report that in Q2 we finally reached, and then surpassed, the pre-pandemic skilled nursing occupancy levels.
James Collister: SkilledMix was down a little bit year over year, but we appear to be settling in at a new normal that is quite a bit higher than pre-pandemic SkilledMix, about 330 bps higher.
David Sedgwick: We still have a ways to go to get to pre-pandemic levels on the assisted living side, but we did see a 280 BIPS increase year over year and a 180 BIPS increase quarter over quarter for assisted living occupancy. As far as the industry and regulatory front go, just a couple quick comments. Two days ago, Medicare announced that fiscal year 2025's Medicare rates would increase 4.2%.
James Collister: We still have a ways to go to get to pre-pandemic levels on the assisted living side, but we did see a 280 BIPS increase year-over-year and a 180 BIPS increase quarter-over-quarter for the assisted living occupancy.
Speaker Change: As far as the industry and regulatory fronts, just a couple quick comments. Two days ago, Medicare announced fiscal year 2025's Medicare rates would increase 4.2%.
David Sedgwick: And on behalf of CareTrust, I want to express our heartfelt gratitude to Mark Parkinson, who is retiring from the American Health Care Association at the end of the year. He's provided terrific leadership to the association for a long time, not the least of which was during the pandemic. And we congratulate and welcome Cliff Porter as the new president and CEO of Okka. We wish both of these important industry leaders luck going forward.
Speaker Change: And on behalf of CareTrust, I want to express our heartfelt gratitude to Mark Parkinson, who is retiring from the American Healthcare Association at the end of the year. He's provided terrific leadership to the association for a long time, not the least of which was during the pandemic.
Speaker Change: And we congratulate and welcome Cliff Porter as the new president and CEO of Okka. We wish both of these important industry leaders luck going forward.
David Sedgwick: Finally, two things. First, I'm very proud of the CareTrust team. An extraordinary year like this wouldn't happen without a talented team, a strong culture, and sacrifice. I'm grateful to work with the best pound-for-pound team I know. Second, I want to recognize the relentless pursuit of quality care and performance by our operators. We are truly blessed to work with some of the very finest operators in the country, proud to report significantly higher quality measures and star ratings than industry averages. James will now provide you with color on the investment landscape and reloaded pipeline.
Speaker Change: Finally, two things. First,
Speaker Change: I'm very proud of the CareTrust team.
Speaker Change: An extraordinary year like this doesn't happen without a talented team, a strong culture, and sacrifice.
Speaker Change: I'm grateful to work with the best pound-for-pound team I know.
Speaker Change: Second, I want to recognize the relentless pursuit of quality care and performance by our operators.
Speaker Change: We are truly blessed to work with some of the very finest operators in the country and proud to report significantly higher quality measures and star ratings than industry averages.
Speaker Change: James will now provide you with color on the investment landscape and reloaded pipeline. James.
James Collister: Thanks, Dave. Let me just briefly provide an update on the investment environment and on our current pipeline. During Q2, we closed approximately $268 million of investments at an estimated stabilized yield of 9.9%. These investments included the expansion of our relationship with an existing operator, Bayshire, through the $61 million acquisition of three California campus facilities, as well as the start of a new operator relationship with Yad Healthcare in connection with our $81 million acquisition of five skilled nursing facilities in the Carolinas. During the quarter, we also closed two mortgage loans.
James Collister: Thanks Dave. Let me just briefly provide an update on the investment environment and on our current pipeline.
James Collister: During Q2, we closed approximately $268 million of investments at an estimated stabilized yield of 9.9%.
James Collister: These investments included the expansion of our relationship with an existing operator, Bayshire, through the $61 million acquisition.
James Collister: of three California campus facilities.
James Collister: as well as the start of a new operator relationship with Yad Healthcare in connection with our $81 million acquisition of five skilled nursing facilities in the Carolinas.
James Collister: The first was a $27 million loan to the buyer of two skilled nursing facilities in Tennessee, leased to affiliates of the Ensign Group. Starting in year four of that loan, CareTrust has a purchase option to acquire the facility. We also funded $90 million of a $165 million mortgage loan and a $9 million preferred equity investment in connection with the borrower's acquisition of eight skilled nursing facilities in the Southeast. Since quarter end, we have exercised our call right on the remaining $75 million.
James Collister: During the quarter, we also closed two mortgage loans. The first was a $27 million loan to the buyer of two skilled nursing facilities in Tennessee leased to affiliates of the Ensign Group. Starting in year four of that loan, CareTrust has a purchase option to acquire the facilities.
James Collister: We also funded $90 million of a $165 million mortgage loan and a $9 million preferred equity investment in connection with the borrower's acquisition of eight skilled nursing facilities in the Southeast.
James Collister: Since quarter end, we exercised our call right on the remaining $75 million.
James Collister: Yesterday, we also announced that we closed on the $260 million mortgage loan and $43 million preferred equity investment in connection with the borrower's acquisition of the Prestige portfolio of 37 skilled nursing and assisted living facilities to be operated by affiliates of the PACS. Now turning to the investment environment, the Skilled Nursing Pipeline continues to reload with a steady flow of interesting and actionable opportunities coming across the desk.
James Collister: Yesterday, we also announced that we closed on the $260 million mortgage loan and $43 million preferred equity investment in connection with the borrower's acquisition of the Prestige portfolio of 37 skilled nursing and assisted living facilities to be operated by affiliates of the PACS group.
James Collister: Now turning to the investment environment.
James Collister: The Skilled Nursing Pipeline continues to reload from a steady flow of interesting and actionable opportunities coming across the desk.
James Collister: Competition for skilled nursing acquisitions is high as ongoing improvement in post-COVID performance has resulted in more facilities approaching or returning to stabilization, and thus, pricing on acquisition targets has increased to some degree, but it's been held in check by the current capital market environment, so valuations remain within historical cap rates for skilled nursing. As for who is selling, we continue to see small and mid-sized regional owner-operators, as well as smaller mom-and-pop operators, selling their portfolios and exiting the business.
James Collister: Competition for skilled nursing acquisitions is high, as ongoing improvement in post-COVID performance has resulted in more facilities approaching or returning to stabilization, and thus pricing on acquisition targets has increased to some degree, but has been held in check by the current capital market environment.
James Collister: Evaluations remain within historical cap rates for skilled nursing.
James Collister: As for who is selling, we continue to see small and mid-sized regional owner operators, as well as small mom-and-pop operators, selling their portfolios and exiting the business.
James Collister: Higher buyer demand, combined with operator exhaustion from the COVID years, existing loan maturities, and a somewhat difficult regulatory environment seem to be the primary factors driving these owners to sell. With respect to the regulatory environment, in some states, we are seeing stricter annual inspection surveys from regulators and corresponding penalties.
James Collister: The higher buyer demand, combined with operator exhaustion from the COVID years, existing loan maturities, and a somewhat difficult regulatory environment seem to be the primary factors driving these owners to sell.
James Collister: With respect to the regulatory environment, in some states we are seeing stricter annual inspection surveys from regulators and corresponding penalties.
William Wagner: In addition, change of ownership approvals in many states are taking longer, and as a result, transactions are delayed as parties wait for regulatory consent. The combination of these factors puts a buyer like us that has operational roots, is well capitalized, nimble, and practical, in a position to provide certainty and solutions for sellers and take advantage of an environment that can facilitate accelerated growth. With the closing of the investments announced yesterday, our total investments made year-to-date equals approximately $765 million at an average yield of 9.5%.
James Collister: In addition, change of ownership approvals in many states are taking longer, and as a result, transactions are delayed as parties wait for regulatory consent.
Speaker Change: The combination of these factors put the buyer like us that has operational roots, is well-capitalized, nimble, and practical in a position to provide certainty and solutions for sellers and take advantage of an environment that can facilitate accelerated growth.
Speaker Change: With the closing of the investments announced yesterday, our total investments made year-to-date equals approximately $765 million at an average yield of 9.5 percent.
William Wagner: The reloaded pipeline today sits at approximately $270 million in real estate acquisitions and consists of some singles and doubles and a couple of mid-sized portfolio transactions. Not included in our quota pipeline are a couple of larger portfolio opportunities that would not only strengthen existing tenant relationships but would also allow us to further diversify our tenant base by commencing relationships with outstanding operators that we have been scouting for some time. Please remember that when we quote our pipe, we only quote deals that we are actively pursuing under our current underwriting standards, and then only if we have a reasonable level of confidence that we can lock them up and close them within the next 12 months. With that, I'll turn it over to Bill.
Speaker Change: The reloaded pipeline today sits at approximately $270 million of real estate acquisitions and consists of some singles and doubles and a couple of mid-sized portfolio transactions.
Speaker Change: Not included in our quota pipeline are a couple of larger portfolio opportunities that would not only strengthen existing tenant relationships, but would also allow us to further diversify our tenant base by commencing relationships with outstanding operators that we have been scouting for some time.
Bill Wagner: Please remember that when we quote our pipe, we only quote deals that we are actively pursuing under our current underwriting standards. And then, only if we have a reasonable level of confidence that we can lock them up and close them within the next 12 months. With that, I'll turn it over to Bill.
William Wagner: Thanks, James. For the quarter, Normalized FFO increased 52% over the prior year quarter to $52.5 million, and Normalized FAD increased 49.5% to $54 million. On a per share basis, normalized FFO increased one cent to 36 cents per share, and normalized FAD also increased one cent to 37 cents per share. And again this quarter, because of our replenishing robust pipeline, we continued to take advantage of our ATM and issued $306.5 million of equity under the ATM during the second quarter, resulting in us having $495 million of cash on the balance sheet at quarter end.
Bill Wagner: Thanks, James. For the quarter, normalized FFO increased 52 percent over the prior year quarter to 52 and a half million, and normalized FAD increased 49 and a half percent to 54 million.
Bill Wagner: On a per-share basis, Normalized FFO increased $0.01 to $0.36 per share, and Normalized FAD also increased $0.01 to $0.37 per share.
Bill Wagner: And again this quarter, because of our replenishing, robust pipeline, we continue to take advantage of our ATM.
Bill Wagner: and issued $306.5 million of equity under the ATM during the second quarter, resulting in us having $495 million of cash on the balance sheet at quarter end.
William Wagner: Since Quarter End, we have used roughly $380 million for investments, leaving us with approximately $100 million as we sit here today. In yesterday's press release, we updated and raised our guidance for this year from normalized FFO per share of $1.42 to $1.44 to a new range of $1.46 to $1.48 and for normalized FAD per share of $1.46 to $1.48 to a new range of $1.50 to $1.52. This guidance includes all investments made to date, a diluted weighted average share count of 146.9 million shares, and also relies on the following assumptions: no additional investments nor any further debt or equity issuances this year, and CPI rent escalations of two and a half percent.
Bill Wagner: Since Quarter End, we have used roughly $380 million for investments, leaving us with approximately $100 million as we sit here today.
Bill Wagner: In yesterday's press release, we updated and raised our guidance for this year from normalized FFO per share of $1.42 to $1.44, to a new range of $1.46 to $1.48, and for normalized
Bill Wagner: FAD per share from $1.46 to $1.48 to a new range of $1.50 to $1.52.
Bill Wagner: This guidance includes all investments made to date, a diluted weighted average share count of 146.9 million shares, and also relies on the following assumptions.
Bill Wagner: No additional investments nor any further debt or equity issuances this year.
Bill Wagner: to CPI rent escalations of two and a half percent.
William Wagner: Our total cash rental revenues for the year are projected to be approximately $212 to $213 million. We've eliminated the reserve discussion going forward as the properties that were making up the reserve are set to be sold, and we don't have any revenue in guidance for them. Not included in this number is the amortization of below-market lease intangibles that will total about $2.3 million, but this will be in the rental revenue number as required by GAAP.
Bill Wagner: Our total cash rental revenues for the year are projected to be approximately $212 to $213 million. We've eliminated the reserve discussion going forward as the properties that were making up the reserve are set to be sold and we don't have any revenue in guidance for them.
Bill Wagner: Not included in this number is the amortization of below market lease intangible that will total about $2.3 million, but this will be in rental revenue number as required by GAAP.
William Wagner: 3. interest income of approximately $61 million. The $61 million is made up of $48 million from our loan portfolio, and $13 million is from cash invested in the money market, for interest expense of approximately $34 million. In our calculations, we have assumed an interest rate of 6.9% for the term loan. Interest expense also includes roughly $2.5 million of amortization of deferred financing, and 5, G&A expense of approximately $25 to $27 million and includes about $5.8 million of deferred stock compensation.
Bill Wagner: 3. Interest income of approximately $61 million. The $61 million is made up of $48 million from our loan portfolio and $13 million is from cash invested in money market funds.
Bill Wagner: for interest expense of approximately $34 million.
Bill Wagner: In our calculations, we have assumed an interest rate of 6.9% for the term loan. Interest expense also includes roughly $2.5 million of amortization of deferred financing fees.
Bill Wagner: 5. G&A expense of approximately $25-27 million and includes about $5.8 million of deferred stock compensation.
William Wagner: Our liquidity continues to remain strong. We have approximately $100 million in cash today and our entire $600 million available under our revolver. Leverage hit an all-time low with a net debt-to-normalized EBITDA ratio of 0.4 times. Our net debt to enterprise value was 2.6% as of quarter end, and we achieved a fixed charge coverage ratio of 8.2 times. Lastly, as long as the price of our equity relative to the current cost of long-term debt issuance remains pretty comparable.
Bill Wagner: Our liquidity continues to remain strong. We have approximately $100 million in cash today and our entire $600 million available under our revolver. Leverage hit an all-time low with a net debt-to-normalized EBITDA ratio of 0.4 times.
Bill Wagner: Our net debt to enterprise value was 2.6% as of quarter end, and we achieved a fixed charge coverage ratio of 8.2 times.
Bill Wagner: Lastly, as long as the price of our equity relative to the current cost of long-term debt issuance remains pretty comparable, we believe that it makes much better sense to continue to fund this replenishing pipeline with equity.
William Wagner: We believe that it makes much better sense to continue to fund this replenishing pipeline with equity; our net debt to EBITDA range of four to five times is still ours. It just may take some time and a lot of investments to get back there, which, like I said last quarter, we plan on doing. And with that, I'll turn it back to David. Thank you.
Bill Wagner: Our net debt to EBITDA range of four to five times is still our range.
Bill Wagner: It just may take some time and a lot of investments to get back there.
Bill Wagner: which, like I said last quarter, we plan on doing. And with that, I'll turn it back to Dave.
David Sedgwick: Thank you guys. Let me conclude the call with three things. Our year-to-date investments equal approximately three-and-a-half times our life-to-date average annual growth rate. And we're not finished with this year. Second, we have a balance sheet that provides enormous flexibility and historic capacity for both the near-term and the mid-term. And third, we're at the start of demographic tailwinds that should last for decades to come. We hope our report's been helpful, and thank you for your continued support. I'm happy to take some questions now.
Dave Sedgwick: Thank you guys. Let me conclude the call with three things. First...
Dave Sedgwick: Our year-to-date investments.
Dave Sedgwick: equal approximately three and a half times our life-to-date average annual growth rate. And we're not finished with this year.
Dave Sedgwick: Second, we have a balance sheet that provides enormous flexibility and historic capacity for both the near-term and mid-term, and third, we are at the start of demographic tailwinds that should last for decades to come.
Dave Sedgwick: We hope our report's been helpful, and thank you for your continued support. Happy to now take some questions.
Operator: Thank you. We will now begin the question and answer session. If you've dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw your question, simply press star 1 again. If you are called upon to ask a 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, press star 1 to join the queue. Our first question comes from a line by Jonathan Hughes with Raymond James. Please go ahead.
Speaker Change: Thank you. We will now begin the question and answer session. If you dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw your question, simply press star 1 again.
Speaker Change: If you are called upon to ask a question or 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.
Speaker Change: Again, press star 1 to join the queue.
Speaker Change: Our first question comes from a line of Jonathan Hughes with Raymond James. Please go ahead.
Jonathan Hughes: Hey, good morning out there. Thank you for the prepared remarks and commentary, and it's been great to see the success over the past 10 years. Thanks, Jonathan. Bye.
Jonathan Hughes: Hey, good morning out there. Thank you for the prepared remarks and commentary. It's been great to see the success over the past 10 years.
Jonathan Hughes: I asked this on the last call, but James was not available to answer. So I'll ask it again to hopefully hear the perspective from his mouth. But the expectations are very high for continued acquisition activity given the leverage profile, and with that comes pressure to get deals done. And what I think I heard you say is that it is becoming a more competitive acquisition environment. Can you? Talk about how you managed to balance those expectations for continued investment activity while maintaining underwriting.
Speaker Change: Thanks, Jonathan.
Speaker Change: I asked this on the last call, but James was not available to answer. So I'll ask it again to hopefully hear the perspective from his mouth. But the expectations are very high for continued acquisition activity given the leverage profile.
Speaker Change: And with that comes pressure to get deals done. And what I think I heard you say is becoming a more competitive acquisition environment.
Speaker Change: Talk about how you managed to balance those expectations for continued investment activity while maintaining underwriting discipline.
James Collister: Yeah, sure, Jonathan, thanks for the question. I think we really should continue what we've been doing, which is focusing on relationships, we're focusing on finding the right operators, and we're, you know, focusing on developing more avenues where pipeline deals can come to us. And so I think as we continue to expand on the relationships that we've forged, as we continue to lend with purpose, as we continue to, you know, be seen as a creative, flexible transaction partner with, you know, high certainty of closing, opportunities will continue to present themselves both traditionally through the broker community but also organically through existing operators, joint venture partners, and relationships we've worked really hard to develop over the past two years.
Speaker Change: Yeah, sure, Jonathan. Thanks for the question. I think...
Speaker Change: We really continue what we've been doing, which is we're focusing on relationships, we're focusing on
Speaker Change: finding the right operators, and we're focusing on developing more avenues where pipeline deals can come to us. And so I think as we continue to expand on the relationships that we've forged,
Speaker Change: As we continue lending with a purpose, as we continue to be seen as a creative, flexible transaction partner, with high certainty of closing, that opportunities will continue to present themselves, both traditionally through the broker community.
Speaker Change: but also organically through existing operators, joint venture partners, and relationships we've worked really hard to develop over the past two years.
Jonathan Hughes: And then on the pipeline that you're looking at today. What?
Speaker Change: That's great. And then on the pipeline that you're looking at today...
James Collister: percent of that would be from, you know, existing relationships. What would be new? I think you mentioned there were some potential new relationships. I didn't I wasn't clear if that was in the pipeline or whether that was like the larger deals that would not be included.
Speaker Change: What?
Speaker Change: percentage of that would be from existing relationships. What would be new? I think you mentioned there were some potential new relationships. I didn't, I wasn't clear if that was in the pipeline or like the larger deals that would not be included in the pipeline.
Jonathan Hughes: A little of both. I think what we have in the pipeline today is a couple that would be new relationships for us and a couple that would be existing, longer-term relationships for us. I would say the pipeline consists pretty exclusively of skilled nursing right now, but it's a mix between, you know, new operators and current, and it's a mix of deal source relationships we've done deals with in the last 12 months. A little bit of all of that.
Speaker Change: A little of both. What we have in the pipe today is a couple that would be new relationships for us and a couple that would be...
Speaker Change: existing longer-term relationships for us.
Speaker Change: I would say it quite consists of pretty exclusively skilled nursing right now.
Speaker Change: But it's a mix between...
Speaker Change: you know, new operators and current and it's a mix of deal source from
Speaker Change: Some from brokers, some from existing operators, some from...
Speaker Change: Relationships we've done deals with in the last 12 months. A little bit of all of that.
David Sedgwick: Okay, last one from me, maybe for Bill or Dave, but when you talk about that leverage target range of four to five times, you did say that's still the target, but I think we've only been within that range a few times in the past five years. And, of course, with lower leverage does come a better equity multiple. But as we think about earnings power on a fully levered basis, should we really be thinking about that four to five times leverage range, or maybe more like three to four? Just any thoughts.
Speaker Change: Okay, last one from me, maybe for Bill or Dave.
Speaker Change: Can you talk about that leverage target range of four to five times? You did say that's still the target but I think we've only been within that range a few times in the past five years and of course with Lower leverage does come a better equity multiple
Speaker Change: But as we think about earnings power on a fully levered basis, should we really be thinking about that four to five times leverage range, or maybe more like three to four? Just any thoughts on that.
Jonathan Hughes: Well, I think you're right. We have kept it quite a bit lower than that stated range in order to fuel this. Elevated growth rate that we're experiencing right now, and we'd like to keep that, the flexibility to take advantage of opportunities like this, but we're not moving off of that four to five times just because, look, if we grow in a significant way, we want to be able to have the flexibility to go up to that range again. If we need to, and you're right as interest rates come down, it becomes really interesting to see what that accretion looks like as we're able to pull that lever a little bit more.
Speaker Change: Thank you.
Speaker Change: Well, I think you're right. We have kept it quite a bit lower than that stated range in order to
Speaker Change: fuel this
Speaker Change: elevated growth rate that we're experiencing right now, and we'd like to keep that.
Speaker Change: flexibility to take advantage of opportunities like this.
Speaker Change: But we're not moving off of that four to five times, just because, look, if we grow in a
Speaker Change: In a significant way, we want to be able to have the flexibility to go up to that range again.
Speaker Change: If we need to, and you're right, as interest rates come down, it becomes really interesting to see what that accretion looks like as we're able to pull that lever a little bit more.
Speaker Change: Thank you for the time.
Austin Wurschmidt: Our next question comes from the line of Austin Wurschmidt with KeyBank Capital Markets. Please go ahead.
Jonathan Hughes: Thanks, Jonathan.
Jonathan Hughes: Our next question comes from the line of Austin Wurschmidt with KeyBank Capital Markets. Please go ahead.
Austin Wurschmidt: Hey, and good morning out there. As you guys continue to make, you know, what I'll call these, these seed investments to some extent in loans like you did early in the third quarter, I guess what's the sort of the multiplier effect or how much beyond those dollars invested would you expect to do in future real estate investments to justify moving forward with the shorter term loan investment?
Austin Wurstman: Hey, and good morning out there. As you guys continue to make, you know, what I'll call these, you know,
Austin Wurstman: You know, seed investments to some extent in loans like you did, you know, in early in the third quarter, I guess what's sort of the multiplier effect or how much beyond those dollars invested would you expect to do in future real estate investments to justify moving forward with the shorter term loan investments?
David Sedgwick: Well, it's hard to put a concrete number on it. When we started this strategy of loaning with this purpose in mind of multiplying and creating a pipeline of acquisitions from it, what I can tell you is that we've received a return on that strategy and investment far quicker and larger than I would have. I suspected when we started a couple years ago.
Speaker Change: Well, it's hard to put a concrete number on it. When we started this,
Speaker Change: multiplying and creating a pipeline of acquisitions from it.
Speaker Change: What I could tell you is we've received a return on that strategy and investment far quicker and larger than I would have
Speaker Change: I suspected when we started a couple years ago.
Austin Wurschmidt: We have a few. I mean, if you look at what we've closed this year and what's in the pipeline. You know, it's north of 300 million in acquisitions that have occurred because of some of those relationships and loans that we've made. And so, as long as we stick to that discipline. I'm not just filling a void or putting money out to do it on a short-term basis, but there's at least a handshake deal and sometimes a contractual obligation for a real estate acquisition from it. We're going to continue to be open to that.
Speaker Change: [inaudible]
Speaker Change: We have a few...
Speaker Change: I mean, if you look at what we've closed this year and what's in the pipe.
Speaker Change: You know, it's north of $300 million of acquisitions that have occurred because of some of those relationships and loans that we've made. And so, as long as we stick to that discipline,
Speaker Change: I'm not just filling a void or putting money out to do it on a short-term basis, but there's at least a handshake deal and sometimes a contractual obligation for a real estate acquisition from it. We're going to continue to be open to that.
David Sedgwick: Appreciate the thoughts there. And then, Dave, you kind of highlighted the additional disposition you teed up this quarter. Seems like a specific situation. But, given the volume of investment opportunities in front of you, could we see capital recycling become a bigger piece of future funding for new investments, just to, you know, enhance overall portfolio quality, credit quality, and just kind of as a normal portfolio management discipline?
Speaker Change: I appreciate the thoughts there. And then Dave, you kind of highlighted the additional disposition you teed up this quarter. Seems like a specific situation.
Dave Sedgwick: I guess given the volume of investment opportunities in front of you, could we see capital recycling become a bigger piece of future funding for new investments?
Speaker Change: Just to, you know, enhance overall portfolio quality, credit quality, and just kind of in a normal portfolio management discipline.
Austin Wurschmidt: Yeah, I think I think it's fair to expect there to be a little bit of that on a routine, regular basis, but nothing significant or sizable. I wouldn't expect, going forward. We certainly don't need the proceeds of that to fund growth. It's very specific to particular assets and operators. And like I said in my remarks, it's a really small, manageable piece of the portfolio. It's not going to be a..., and anything more than that as we sit here today.
Dave Sedgwick: Yeah, I think, I think there's, it's fair to expect there to be a little bit of that on a routine, regular basis, but nothing significant or sizable. I wouldn't expect.
Dave Sedgwick: piece of the portfolio. It's not going to be...
Dave Sedgwick: anything more than that as we sit here today.
David Sedgwick: And then just from a timing perspective, you know, the Midwest operator, certainly that one's kind of been taking a little bit longer than probably you had anticipated for these, you know, assets you just added to the pool this quarter. Any sense of timing of when you'd expect to transact?
Speaker Change: And then just from a timing perspective, you know, the Midwest operator certainly that one's kind of been drug out a little bit longer than probably you anticipated. For these, you know, assets you just added to the pool this quarter, any sense on timing of when you'd expect to transact?
Austin Wurschmidt: Well, you're right. Some things are taking longer than I would expect, and so I'm a little bit hesitant to predict, but, you know, I'm hopeful that we'll have this transition and disposition work done by the end of the year.
Speaker Change: Well, you're right. Some things are taking longer than I would expect, and so I'm a little bit hesitant to predict. But, you know, I'm hopeful that we'll have this transition and disposition work done by the end of the year.
Austin Wurschmidt: Great. Thanks for the time.
Speaker Change: Great. Thanks for the time. Thanks, Austin.
Michael Carroll: Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.
Speaker Change: Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.
Michael Carroll: Yep, thanks. James, can you provide some color on CareTrust's current underwriting standards when you're pursuing new deals? And how have these standards changed over the past eight months? I mean, obviously, interest rates have come down, competition has picked up. I mean, so how are you looking at transactions a little bit differently today than maybe you were at the start of the year?
Michael Carroll: Thanks. James, can you provide some color on what is CareTrust's current underwriting standards when you're pursuing new deals? And how have these standards changed over the past eight months? I mean, obviously interest rates have come down, competition has picked up. I mean, so how are you looking at transactions a little bit differently today than maybe you were at the start of the year?
James Collister: I don't think we look at them too awfully different. Mike, I think that we're going to still really shoot to try to get, you know, one-four coverage and, on skilled nursing, a yield that is at least in the nines. That's what we're going to continue to shoot for. I think what has maybe changed, call it in the last two years, is that as we find opportunities that are on the path back to being stable but are not there yet.
James Collister: I don't think we look at them too awfully different. Mike, I think that we're going to still really shoot to try to get, you know, 1-4 coverage.
Speaker Change: And on skilled nursing, you know, a yield that is at least in the nines, that's what we're going to continue to shoot for. I think what has maybe changed, call it in the last two years, is that as we find opportunities that are on the path back to being stable but are not there.
James Collister: I think there is an enhanced collaborative process with the tenants to really underwrite carefully what we think. David Sedgwick, William Wagner, Austin Wurschmidt, Michael Carroll, Juan Sanabria, Alec Feygin; you don't see as much stabilized still yet as maybe years past. But I think we've gotten better at working with tenants to enhance that underwriting process of how long the term takes and when they get.
Speaker Change: I think there's an enhanced collaborative process with the tenants to really underwrite carefully what we think is important.
Speaker Change: Stabilized coverage is going to be at those facilities and how the operators going to be able to get there and really make sure that we and the tenant are comfortable with the assumptions we're making and that we see the right metrics and indicators for getting back.
Speaker Change: You know, 2014 type coverage in our typical yield range, so I think that
Speaker Change: You don't see as much stabilized still yet as maybe years and you know past
Speaker Change: but I think
Speaker Change: We've gotten better at working with tenants to enhance that underwriting process of how long the term takes and when they get there.
Michael Carroll: Okay, where are cap rates today? I know you said in your prepared remarks that they're still within historical ranges.
Speaker Change: Where are cap rates today? I know you said in your prepared remarks they're still within historical ranges.
Michael Carroll: Noah, there's a couple of large debt deals that you announced, I guess, post-quarter end, that were at 7.9 and 8.5. And I guess, what's the reason that you're willing to go below 9 for those transactions? Is it just because there are larger transactions? And are you willing to go a little bit lower on the debt side? I guess, how should we think about that?
Speaker Change: Now, there's a couple of large debt deals that you announced, I guess, post-quarter end, that was at $7.9 and $8.5.
Speaker Change: And I guess, what's the reason that you're willing to go below nine for those transactions? Is it just because that there are larger type transactions? And are you willing to go a little bit lower on the debt side? I guess, how should we think about that?
James Collister: I think we're willing to go a little lower anytime the deal is, you know, sizable and bigger and competitive. And I think also, Mike, as we do bigger deals, we want to create, you know, a sustainable rent or interest stream, and if we take a little hit on yield for more comfort on coverage, we're going to make that trade more often than not, especially on larger deals. And I think that's kind of what you see with the loan yesterday and the loan in June. It's that exact approach.
Speaker Change: I think we're willing to go a little lower any time the deal is, you know, sizable and bigger and competitive. And I think also, Mike, as we do bigger deals, you know, we want to create...
Mike: sustainable rent or interest stream.
Mike: If we take a little, you know, hit on yield for more comfort on coverage, we're going to make that trade more often than not, especially on larger deals. And I think that's kind of what you see.
Mike: with the loan yesterday and the loan in June .
Michael Carroll: I don't know if you can talk too much about the Prestige transaction, but what were the give and takes on doing that as a mortgage versus buying some of the real estate and then also the addition of the preferred with the operator? How do you think about creating that type of transaction utilizing different levers?
Mike: that exact approach.
Speaker Change: Okay, and I don't know if you can talk too much about the Prestige transaction.
Speaker Change: But I guess, what were the give and takes on doing that as a mortgage versus buying some of the real estate and then also kind of the addition of the preferred with the operator? I mean, how do you think about creating that type of transaction utilizing, I guess, different levers?
James Collister: Yeah, I mean, I say, look, when we looked at it, you know, from the acquisition perspective, I mean, we tried to be opportunistic, but we got to pick our spots, and we felt like doing it completely on our own.
Speaker Change: Yeah, I mean I say look when we looked at it, you know
Speaker Change: from, you know, thinking of whether it would work from an acquisition perspective. I mean, we tried to be opportunistic, but we got to pick our spots, and we felt like doing it completely on our own. We were going to...
James Collister: We were going to have a tough solve, and we're going to have difficulty unlocking the value of some of the assets, including, in particular, the 15 leasehold assets that are with third-party landlords. So we liked the profile of aligning the borrower and the operator, who both put equity into the real estate side of the deal. We liked that we still had over $40 million of, for us, real estate equity in the PREP we put out.
Speaker Change: It's a tough solve, and we're going to have difficulty unlocking the value of some of the assets, including in particular the
Speaker Change: the 15 leasehold assets that are with third-party landlords.
Speaker Change: We liked better the, you know, the profile of aligning the borrower and operator who both put equity into the real estate side of the deal. We like that we've still got over $40 million of essentially, you know, for us, real estate equity in the PREP we put out.
James Collister: And so on that particular deal, we felt like the loan made more sense and was a better, you know, structure for us. But we look at each deal individually. You know, and our preference is always going to be to acquire. But sometimes we pick our spots and see a different alignment structure may fit what we're looking to do better. And that was the case with Prestige.
Speaker Change: And so, on that in particular deal, we felt like...
Speaker Change: The loan made more sense and was a better, you know, structure for us. But we look at each deal individually, you know, and our preference is always going to be to acquire. But sometimes we pick our spots and see a different alignment structure may fit what we're looking to do better. And that was the case with Prestige.
Speaker Change: Okay, great. Thanks.
Juan Sanabria: Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Please go ahead.
Speaker Change: Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Please go ahead.
Juan Sanabria: Hi, thanks for your time. Just curious about how we should think about the blended yield there, given you mentioned increased competition?
Juan Sanabria: Hi, thanks for the time. Just curious on the
Juan Sanabria: $270 million pipeline, the mix between fee simple loans and how should we think about the blended year yield there given you mentioned increased competition?
Juan Sanabria: You know, on the loan itself, Juan, the one we announced.
Juan Sanabria: For the pipeline, the $270 million, what are the yield expectations given higher competition levels? Yeah, I got it.
Speaker Change: Again, on the loan itself, Juan, the one we announced yesterday.
Speaker Change: No, so for the pipeline, the $270 million, what are the yield expectations given higher competition levels? Oh, yeah, got it.
James Collister: It's all skilled nursing, and I would say that the yields are still where they've been for us. I mean, it's going to be more likely than not in the nines. We push it where we can, where coverage seems like it's going to fit for that deal. But I think what you see in the pipe right now is
Juan Sanabria: It's all skilled nursing, and I would say that the yields are still where they've been for us. I mean, it's going to be more likely than not in the nines when we push it where we can, where coverage seems like it's going to fit for that deal. But I think what you see in the pipe right now is...
James Collister: right in the sweet spot of where we've been, which is in
Speaker Change: You know.
Speaker Change: right in the sweet spot of where we've been, which is in...
James Collister: Just to clarify, there are no loans in that $270 million. It's just a few simple acquisitions of SNF.
Speaker Change: The Midnines.
Speaker Change: Just to clarify, there's no loans in that $270 million?
Speaker Change: It's just a few simple acquisitions of SNFs.
James Collister: Okay, and then how should we think about the remaining dispositions and repositionings that are left to be done, hopefully, by year-end in terms of any offsetting dilution to sort of the current run rate?
Speaker Change: Okay, and then how should we think about the remaining dispositions and...
Speaker Change: Repositionings that are left to be done hopefully by year-end in terms of any offsetting dilution to the sort of the current run rate.
David Sedgwick: No, I think in guidance, we're not expecting any income from any of those facilities that are being transitioned or sold. So anything that we were able to transition and then Recycle is going to be at Creative Next Year for us.
Speaker Change: income from from any of those facilities that are
Speaker Change: being transitioned or sold. So anything that we were able to transition
Speaker Change: and then Recycle is going to be a creative next year for us.
Juan Sanabria: That's it for me. Thank you very much.
Juan Sanabria: No, it's too late. I'm just kidding. Go ahead.
Speaker Change: That's it for me. Thank you very much. One more. No, too late. I'm just kidding. Go ahead. Bill, can you clarify or comment if there's been any ATM activity quarter to date?
Juan Sanabria: Bill, can you clarify or comment if there's been any ATM activity quarter to date?
William Wagner: There has not been any ATM activity quarter to date, subsequent to the quarter, mostly because we've been in a blackout.
Speaker Change: Mostly because we've been in a blackout.
Speaker Change: Fair enough. Thank you.
John Klikowski: Our next question comes from the line of John Klikowski with Wells Fargo. Please go ahead.
Speaker Change: Our next question comes from the line of John Klikowski with Wells Fargo. Please go ahead.
David Sedgwick: Thank you. It looks like you transitioned a few assets to help prepare them for sale, and we know there's been some operators you've been patient with. Are you getting to the point where you're more likely to transition those out, and then what's the impact and guidance there?
John Klikowski: Thank you. It looks like you transitioned a few assets to help for sale and we know there's been some operators you've been patient with. Are you getting to the point where you're more likely to transition those out and then you know what's the impact of guide there?
David Sedgwick: Yeah, that's exactly right. We have gone from being patient to acting on those things to make a change. And so, like I said in my prepared remarks, all the transitions that are ongoing and the dispositions that we've announced effectively deal with all of the underpayments for this year. So once that's all complete, As we get new rents from the transition to assets, that'll be additive to next year, and then we'll be able to... recycle those other. Accepting to the new acquisition.
Speaker Change: Yeah, that's exactly right. We have gone from being patient to acting on those to make a change. And so, like I said in my prepared remarks,
Speaker Change: All the transitions that are ongoing and the dispositions that we've announced effectively deal with all of the underpayments for this year.
Speaker Change: So, once that's all complete,
Speaker Change: As we
Speaker Change: As we get new rents from the transition to assets, that'll be additive to next year, and then we'll be able to...
Speaker Change: recycle those other assets into new acquisitions.
David Sedgwick: Got it. And then maybe jump into this morning's jobs report and some of the discussions we've heard about a softening labor environment. How has that started to flow through, if at all, to your tenants? Are you seeing any improvement in your ability to get labor in the door, and do you expect that to translate to better coverage? Yeah, we do. We are seeing...
Speaker Change: Got it. And then...
Speaker Change: Maybe jump into this morning's jobs report and some of the discussions we've heard about a softening labor environment. How has that started to flow through, if at all, to your tenants? Are you seeing any improvement in your ability to get labor in the door, and do you expect that to translate to better coverage?
David Sedgwick: Yeah, we do. We are seeing and hearing from our operators that the labor environment is normalizing. In our portfolio alone, we've seen agency expense drop 35% in the last year from, You know, it's year over year. So that's a good trend. There's still some agency fat in the portfolio, so there's some tailwind there for us as that continues to normalize.
Speaker Change: Yeah, we do. We are seeing and hearing from our operators that the labor environment is normalizing. In our portfolio alone, we've seen agency expense drop 35 percent.
Speaker Change: in the last year from
Speaker Change: You know, it's year over year, so that's that's a good trend. There's still some agency fat in in the portfolio, so there's some some tailwind there for us as that continues to normalize.
Speaker Change: Got it. Thank you.
Rich Anderson: Our next question comes from a line from Rich Anderson with Wedbush. Please go ahead. Thanks.
Speaker Change: Our next question comes from the line of Rich Anderson with Wedbush. Please go ahead. Thanks. Question back on the disposition. If I missed it, I apologize. But do you have an idea of what type of volume we could be talking about to sort of eliminate your problem children in the portfolio?
Rich Anderson: Thanks. Question back on the disposition. If I missed it, I apologize, but do you have an idea of what type of volume we could be talking about to sort of eliminate your problem children in the portfolio?
David Sedgwick: Volume in terms of the number of assets? Dollars. Oh, I. No, I mean, the my hesitation in answering that is that when assets are on the market, we're a little reluctant to talk openly about pricing expectations and what we would expect to receive, just because we don't want to tip our hand too much to the market. But there is information in the queue about what we've done in terms of impairments, so you can kind of put some things together there. Okay.
Speaker Change: Volume in terms of number of assets? Dollars.
Speaker Change: Oh.
Speaker Change: Bye.
Speaker Change: No, I mean, the...
Speaker Change: My hesitation in answering that is that when assets are on the market, we're a little reluctant to talk openly about pricing expectations and what we would expect to receive.
Speaker Change: We don't want to tip our hand too much to the market.
Speaker Change: But there is information in the queue about what we've done in terms of impairments and.
Speaker Change: You can kind of...
Rich Anderson: In terms of the balance sheet, your non-existent leverage ratio is the method to really use that in this environment, even though we're seeing interest rates come down now, but it's still high relative to, probably too? recent norms. Is the method to have some room to inherit reasonably priced debt if you were to go and buy something of size, and then you can, you know, kind of fold that into your balance sheet that way? Is that the only way you could see anytime soon getting up to your, you know, four and a half-ish type of leverage ratio?
Speaker Change: Put some things together there. Okay. In terms of the balance sheet, you know, your non-existent leverage ratio, is the method to really use that in this environment, even though we're seeing interest rates come down now, but still high relative probably to?
Speaker Change: recent norms.
Speaker Change: Is the method to have some room to inherit reasonably priced debt if you were to go and buy something of size and then you can, you know, kind of fold that into your balance sheet that way? Is that the only kind of way you could see?
Speaker Change: Any time soon, getting up to your 4.5-ish type of leverage ratio.
William Wagner: Hey Rich, it's Bill. The only way in the next 12 months that I see us getting that, getting the leverage back up to our stated range would be some serious investment flow. So I don't think it's realistic that in the next 12 months we'll get up there. But having leverage so low right now does allow us the optionality of assuming debt on larger transactions, as well as utilizing the revolver when interest rates come down.
Speaker Change: Hey, Rich. It's Bill. The only way over, call it the next 12 months that I see us,
Rich Anderson: getting that, getting the leverage back up to our stated range would be
Rich Anderson: some serious investment flow. So I don't think it's realistic that in the next 12 months we'll get up there.
Rich Anderson: But having leverage so low right now does allow for us the optionality of assuming debt on larger transactions, as well as utilizing the revolver when interest rates come down.
Rich Anderson: Do you have a sense of how much earnings you're leaving on the table because of your... Your leverage profile. One would think that if you had more leverage, you'd have more earnings.
Speaker Change: Do you have a sense of how much earnings you're leaving off the table because of your...
Speaker Change: Your leverage profile, one would think that if you had more leverage, you'd have more earnings.
William Wagner: No, I don't think so right now because of the price, given where rates are relative to the price of equity. I don't think we're losing.
Speaker Change: No, I don't think so right now because of the price, given where rates are at relative to the price of equity, I don't think we're leaving.
William Wagner: I think the outlook is where we'll see, as Dave said in his prepared remarks, some supercharged growth when rates come down, and we have to tap that lever, you know, the debt lever, to really see it.
Speaker Change: I don't think we're losing anything there.
Speaker Change: I think the outlook is where we'll see, as Dave said in his prepared remarks, is some supercharged growth when rates come down and we have to tap that lever, you know, the debt lever, to really see it.
Rich Anderson: Yeah, a high-class problem. Last question, CMS, you mentioned 4.2% for FY25. I actually think that was revised up from their original proposal a bit. But do you think that this is it, the last year, 2025, of this sort of elevated number as it relates to the recapture of inflation and all that sort of stuff? Or do we start to trend back down to a more typical 2-ish percent type of growth rate in FY26 and beyond? I'm just curious about your thoughts there. Well, thanks.
Speaker Change: Yeah, high-class problem. Last question, CMS, you mentioned 4.2% for FY25. I actually think that was revised up from their original
Speaker Change: ...proposal a bit, but...
Speaker Change: Do you think that this is it, the last year, 2025, of this sort of elevated number, you know, as it relates to, you know, recapture of inflation and all that sort of stuff. Do we start to trend back down?
Speaker Change: to a more typical two-ish percent type of growth rate in fiscal 26 and beyond. I'm just curious your thoughts there. Thanks.
David Sedgwick: Well, thanks. I'd like to phone a friend on that one and call the folks at AHCA to confirm or deny what I'm about to say. So, with that disclaimer, I think that we're not quite back yet to getting, I don't think we've outrun the inflationary effects on the math because the Medicare and Medicaid rates, depending on the state, there's a couple years of lag that is going into that map. So the rate increase that we're getting for fiscal year 25 isn't really based on that.
Speaker Change: Well, thanks. I'd like to phone a friend on that one and call folks at ACCA to confirm or deny what I'm about to say. So with that disclaimer, I think that we're not quite back yet to getting...
Speaker Change: I don't think we've outrun the inflationary effects on the math because the Medicare and Medicaid rates, depending on the state, there's a couple years of lag that is going into that math.
Speaker Change: So, the rate increase that we're getting for fiscal year 25 isn't really based on
David Sedgwick: 2024, inflation on labor. It's actually further back than that. And so I think that we still might have a little bit more of an elevated rate, an increased profile going forward, but that's. Like I said, I could be wrong, but I think that's my take on it. Okay. Sounds good.
Speaker Change: [inaudible]
Speaker Change: inflation on the labor, it's actually further back than that. And so I think that we still might have a little bit more of a elevated rate, increased profile going forward. But
Speaker Change: That's it for today.
Speaker Change: Like I said, I could be wrong, but I think that's my take on it. Okay. Sounds good. Thanks very much. Thanks, Rich.
Rich Anderson: Okay, sounds good. Thanks very much.
Alec Feygin: Our next question comes from the line of Alec Feygin with Baird. Please go ahead. All right.
Speaker Change: Our next question comes from the line of Alec Feygin with Baird. Please go ahead.
Alec Feygin: Hi, thanks for taking my question. The first one for me is, is there a limit on how big the loan book can get? Anything in the covenants or internal to the company?
Alec Fagan: Hi, thanks for taking my question. First one for me is, is there a limit on how big the loan book can get? Anything in the covenants or internal to the company?
David Sedgwick: No, I don't, I don't think we're going to bump up against any covenants anytime soon. We care about it. We look at it, but the, the tolerance that we have for it is, is really connected, like I said earlier, to the expected off-market acquisitions that it brings. Virtually all of the acquisitions that that strategy has brought have been off-market deals that we would not otherwise have seen.
Speaker Change: No, I don't think we're going to bump up against any covenants anytime soon. We care about it. We look at it. But the tolerance that we have for it is really connected, like I said earlier, to the expected off-market acquisitions that it brings.
Speaker Change: virtually all of the
Speaker Change: acquisitions that that strategy has brought have been off-market deals that we would not have otherwise seen.
Alec Feygin: Yeah, thanks, hon. Kind of switching to the tenant watch list, is there any difference, quarter over quarter, in operators who are on that watch list? No. Got it. And what drove the $25 million dollar impairment? Is there an operator-specific or real estate-specific reason?
Speaker Change: [inaudible]
Speaker Change: Kind of switching to the tenant watch list, is there any difference quarter over quarter in operators who are on that watch list? No.
Speaker Change: Got it. And what drove the $25 million dollar impairment?
David Sedgwick: Yeah, it was, it was classifying a number of assets as held for sale.
Speaker Change: Is there an operator specific or real estate specific?
Speaker Change: Yeah, it was classifying a number of assets as held for sale.
David Sedgwick: Got it. That's it for me. Thank you.
Speaker Change: Got it. That's it for me. Thank you.
Speaker Change: You bet. Thank you.
David Sedgwick: That concludes our Q&A session. I will now turn the call back over to Dave Sedgwick for his closing remarks.
Speaker Change: That concludes our Q&A session. I will now turn the call back over to Dave Sedgwick for closing remarks.
David Sedgwick: Well, guys, really appreciate your time and your interest. Again, just want to thank the CareTrust team for an extraordinary year to date and really excited to see how the second half of the year shapes up and set up for an amazing 2025. Have a great weekend, everybody.
Dave Sedgwick: Well guys, really appreciate your time and your interest. Again, just want to thank the CareTrust team.
Speaker Change: for an extraordinary year to date and
Speaker Change: Really excited to see how the second half of the year shapes up and setting up for an amazing 2025.
Operator: This concludes today's call. You may now disconnect.
Speaker Change: Have a great weekend, everybody.
Speaker Change: This concludes today's call. You may now disconnect.
Speaker Change: [inaudible] In this film, David Sedgwick and William Wagner take a look back at their lives and how they've changed over the years. In this film, David Sedgwick and William Wagner take a look back at their lives and how they've changed over the years.