Ladies and gentlemen, thank you for standing by and welcome to the CareTrust REIT Second Quarter 2022 earnings call. At this time, all participants are in a listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. I would now like to turn the call over to your host, Lauren Beale. You may begin.
Thank you. Welcome to CareTrust REIT's second 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 the current expectations, assumptions, and beliefs of CareTrust business and the environment in which it operates. These statements may include projections regarding future financial performance, dividends, acquisitions, investments, refinance, financings, and other matters, and may not reference other matters affecting the company's business or the businesses of its investments, including factors that are beyond our control, such as natural disasters, pandemics such as COVID-19, and governmental actions. 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.
We encourage you to review CareTrust's SEC filings for a more detailed 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, CareTrust 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, FFO, and FAD, or FAD, and normalized EBITDA, FFO, and FAD. When viewed together with GAAP results, the company believes these measures can provide a more complete understanding of its business, but cautions that they should not be relied upon to the exclusion of GAAP results.
Yesterday, CareTrust filed its Form 10-Q, this earnings press release, and its quarterly financial supplement, each of which can be accessed on the investor relations section of CareTrust's website at www.caretrustreit.com. A replay of this call will also be available on the website for a limited period. On the call this morning are Dave Sedgwick, President and Chief Executive Officer, Bill Wagner, Chief Financial Officer, Mark Lamb, Chief Investment Officer, and James Callister, Executive Vice President. I will now turn the call over to Dave Sedgwick, CareTrust REIT's President and CEO. Dave?
Thank you, Lauren, and good morning, everyone. Today, we'll give you an update on the progress we are making on the announced dispositions and on our current outlook for new investments. With this quarter's supplemental, we begin to preview what the portfolio will look like after the dispositions or re-tenanting work is complete by excluding those properties and tenants from the deck. Before I hand the call over to James, Mark, and Bill, let me comment on the extraordinary time in which we live and operate. Since we announced plans in February to de-risk the portfolio, the world has changed quite a bit for us and for our operators. Surging inflation, rising rates, and daily talk of a recession have an impact. For us and skilled nursing operators, it's not all headwinds.
For our disposition work, yes, the motivation and ability of some buyers in the market has softened, particularly those dependent on lenders. That's okay. We adapt and run parallel paths of selling and re-tenanting, and ultimately, we'll end up with a substantially de-risked portfolio. We're on track to close on most of that work in Q4. For our investment activity, as rates continue to rise and lenders become more cautious, we would expect a couple things to tip in our favor when it comes to growth. First, pricing should moderate, and second, sellers should prefer the certainty buyers like ourselves present. We're seeing evidence of that just in recent weeks. Now as for how today's macro environment affects our operators, again, there are two sides to that coin.
On the one hand, the persistence of COVID, inflation, and a tight labor market make today a time unlike any of us can recall. The best operators truly distinguish themselves during times like this. Historically, skilled nursing has been a net beneficiary from recessionary periods because as the labor market loosens, people come back to work. Now looking at the portfolio, we reported 94% of rent collected in the quarter with cash deposits. As for July, we collected 94% exclusive of any cash deposits. August collections appear to be in line with July. Average quarterly occupancy for skilled nursing operators grew by 1.4% or 98 basis points over Q1. For seniors housing, occupancy grew 2.8% or 215 basis points over Q1.
Now as for the regulatory environment, we were encouraged to see the final market basket adjustment from CMS come in better than expected at 2.7%. We're also pleased to see CMS decide to recalibrate PDPM over two years instead of all at once. With that, I'll turn it over to James to update you on the disposition progress.
Thanks, Dave. We continue to actively work on selling, re-tenanting, and repositioning certain assets in an effort to fortify the portfolio. Since our earnings call in February, the acquisitions and dispositions market for skilled nursing and seniors housing facilities has been in a state of change as lenders consider tightening or pulling back on lending due to concerns of a possible recession. Despite the changing circumstances, during Q2 and since, we have made meaningful progress on pushing our planned dispositions forward. We have entered into a purchase and sale agreement to sell the skilled nursing portfolio that we have brought to market. We've also signed up several letters of intent, and as a result, are well into the negotiations on several purchase and sale agreements. We're also negotiating several LOIs, and currently, we continue to regularly receive written offers from potential buyers that we are considering and evaluating.
As Dave mentioned, in some cases, we've adapted and are pursuing parallel paths of selling and re-tenanting with the same ultimate destination in mind, a substantially de-risked portfolio. We remain on track to close and wrap up much of the disposition work by the end of Q4, and we'll provide updates to you as deals further solidify. With that, I'll turn it over to Mark.
Thanks, James, and good morning, everyone. In Q2, we closed on a $75 million C-PACE loan, which is secured by a large portfolio of skilled nursing facilities located in the Mid-Atlantic at a rate of 8.4% and a term of five years. As part of the transaction, we also originated a $25 million mezzanine loan that bears a rate of 11% for 10 years. This past Monday, we closed on a $22.3 million DT secured by five California skilled nursing assets. The loan is a SOFR-based rate with a floor of 8.5%. These fundings bring our 2022 year-to-date total to over $144 million at an average of approximately 9%. Looking to the market, we've seen an uptick in our bread-and-butter acquisition opportunities for skilled nursing facilities.
Seemingly, as the debt markets tighten up, and in some instances, sellers are looking to buyers that have the ability to cash for the acquisition. We view this as a shift in the market to prioritizing certainty of close, a position the REITs have not enjoyed for some time now. Despite these shifts, we are very careful to underwrite and value assets in today's market as we need to ensure the fundamentals at the facility level are in place or have the ability to reach the necessary key factors for our operators to execute on their business plans for the life of our long-term leases. The pipeline today is in our normal $100-$125 range, with a couple of big deals out there that could push this number up.
As we said before, large portfolio transactions are low probability for us, but we continue to look for opportunities that can be accretive to our operators perspective by either adding buildings in a market or by entering a market with enough purchasing power to attract the right kind of staff to effectively plan and providing first-class resident care. We will continue to execute on our acquisition strategy of disciplined growth, just as we have over the past eight years in building CareTrust. Now I'll turn it to Bill to discuss the financials.
Thanks, Mark. As previously mentioned, good progress continues to be made on our dispositions. When they firm up and we begin announcing the multiple expected sales deals, which will make the forward-looking financial picture a little more clear, I would expect that we would resume publishing guidance. In the meantime, stay tuned for the upcoming disposition announcements. Now on to the quarter and a little color on the numbers. For the quarter, normalized FFO slightly decreased 0.7% over the prior quarter to $35.6 million. Normalized FAD slightly decreased 1.7% to $37.5 million. On a per-share basis, normalized FFO was flat over the prior year quarter at $0.37 per share, and normalized FAD slightly decreased 2.5% to $0.30 per share.
Rental income for the quarter was $46.8 million compared to $46 million in Q1. The increase of $800 thousand is due to the following three items. One, a $253 thousand decrease in cash rents, which is made up of unpaid rent of $916 thousand, offset by an increase from new investments and CPI bumps of $663 thousand. Two, an increase in reimbursed property expenses of $77 thousand. And three, a decrease in write-offs of $977 thousand, as we had none this quarter. Interest expense was up $561 thousand from Q1 due to a higher LIBOR rate, which accounted for most of the increase totaling $502 thousand, and higher borrowings under our revolver, which made up the remaining $59 thousand.
G&A expense was down $237,000 from Q1 due to compensation related items of $655,000, offset by other corporate related items of $418,000. I'm expecting this year's G&A to be around $20 million. Cash collections for the quarter came in at 93.9% of contractual rent and includes the application of $900,000 security deposits. Without the application of the security deposit, cash collections was 92.1% of contractual cash rent. In July, we collected 102.1% of contractual cash rents due from our operators, but that percentage includes cash deposits. Excluding those cash deposits, contractual cash rents collected was 94.1%. We expect August collections to be similar to what July was, with $0 coming from the application of security deposits.
Our liquidity remains extremely strong, with approximately $16 million in cash and $385 million available under the revolver. Leverage also continued to be strong, with net debt to normalized EBITDA ratio of 4.3x. Our net debt to enterprise value was 30.2% as of quarter end, and we achieved a fixed charge coverage ratio of 7.5x. With that, I'll turn it back to Dave.
Thank you, Bill. We hope this discussion's been helpful. Thank you for your interest and support. With that, be happy to take your questions.
Well, ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone keypad. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets. Your line is open.
Great. Thank you, guys. It sounded like in the release you talked about, you know, running this parallel process and there's a chance that, you know, you could re-tenant maybe, you know, more of these assets than maybe, you know, it seemed like 30- 60 days ago. I guess I'm just curious first, am I reading that correctly? You know, given your comments about still some strength in the-
Not just on the buyer's ability to but also in operator's ability to step in. In some cases, where we are today with a particular operator that we would have liked to rent originally, maybe there's a lot stronger today than they were at the start of the year, and that option to retain assets and fold those into an existing net lease are pretty attractive. In some cases, we're looking at it for that reason. In other cases, we're looking at it because just in an abundance of caution, we want to have a solid plan B in case somebody on the buyer side is a little soft with us.
Got it. Then, you know, how much of that, Dave, is a reflection too of just, you know, you saw some improvement across the portfolio and fundamentals. Is that a factor? You know, how should we think about the timeline or process that it would take to re-tenant and sort of, you know, get things underway and get the improvement versus being able to redeploy that into a more stabilized type deal, you know, stabilized acquisition?
Yeah, interesting. The first part of your question, I'd say does have a part to play as we do see some operators' portfolio improving. That gives them sort of the mindset to shift from defense to offense, and there might be an opportunity. From a timing perspective, it's always gonna be quicker, generally speaking, to re-tenant than to go through a sales process. In any event, like James mentioned, we feel like even though things have gotten pushed a month or two because of how the world has changed, we're still confident that, you know, most of this work should be done by year-end.
That's helpful. Thanks for the time.
You bet.
One moment for our next question. Our next question comes from Steven Valiquette with Barclays. Your line is open.
Thanks. Hello, everyone. Thanks for taking the question. Yeah, I guess my question kind of builds a little bit on the first one. I guess, as you think through all the scenarios and that last comment you made about re-tenanting being quicker than asset sales and then having to redeploy that, I guess I'm just curious how you or how high you value the avoidance of dilution in all your decisions around this versus just doing what's right for the company longer term. You know, the consensus right now still has numbers going up, I guess, pretty meaningfully versus in 2023 versus 2022. I know you're not giving any guidance today, but how should we just think about potential short-term dilution around this whole process versus what you thought six months ago?
Just any updated thoughts around that at a high level would be great. Thanks.
Yeah. Thanks, Steve. I think our mindset has not changed. When we made the decision to run this asset management disposition, de-risking process back in February, we weren't just being reactionary to the couple of operators that couldn't pay. We also looked and tried to predict who else might have difficulty. So that's kinda how we came up with the group of assets and operators that we did. Our preference, I would say, is still to go through with disposition over re-tenanting in most cases because in our analysis, long term, we think that that's gonna produce the most benefit for earnings.
In other words, the analysis of what's the future rent from redeployed asset, redeployed sales versus what's the earnings from re-tenanting at a lower rent, that's the crux of what we look at, and our bias is always gonna be toward the long-term financial strength of the portfolio.
Okay. That definitely helps to frame that better, so appreciate it. Think that's it for us. Thanks.
Thanks, Steve.
One moment for our next question. Our next question comes from Juan Sanabria with BMO. Your line is open.
Hi, good morning. Thanks for the time. Just curious on the transactions market, you kind of spoke to a change recently. What do you think that actually means in terms of where cap rates could be and/or coverage levels could be if you're able to kind of reengage in traditional fee simple acquisitions for either seniors housing or skilled nursing? I'm not sure how the pipeline is skewed.
Yeah, I think cap rates are, you know, probably not moving as quickly, just because I think what we're seeing, as Dave mentioned, you know, this phenomenon in recent weeks. Really, what's taken place is I think in the, you know, so-called traditional buying market or bank lending market, lenders are pulling back, maybe not going as high on the capital stack, and obviously rates are rising. I think just we're starting to see some inbound on opportunities where somebody, you know, maybe either team up with us or maybe they want to sell a couple assets to us, or even brokers calling us because they know we can write the check. I think it's too early to say exactly where cap rates are going.
I think we're starting to see just a shift from, you know, kind of, you know, the auction process, multiple rounds with the best and final and numbers, you know, call it in Q1 that were, you know, kind of all-time highs to now more of a softer market where, you know, where folks value, you know, our transactional acumen, our user friendliness and our ability to write the check. I think it's too early to say on, you know, exactly how fast, you know, cap rates and are rising while per bed pricing is dropping. We don't quite have, you know, it's still a moving target, but, you know, I think we'll know over the coming quarters.
You just to a point there, you said pricing per unit is dropping? Just wanted to clarify that.
Price per bed is in some markets we're starting to see it's down pretty substantially.
Okay. Just maybe a clarification on a point made on the prepared remarks. I'm not sure if I misunderstood. Did you say in August there's no security deposits expected in terms of helping to pay cash rents? Is that because the security deposits have run out? Just some clarification there.
No. What I meant was we expect cash collections to come in at around 94 percent, which does not include using any security deposits.
Great. Thank you. One quick one. I noticed Noble dropped off the top tenant list. Is there, is that because they're part of what's anticipated that you said that the supplemental has changed? Or just curious on that driver.
Yeah. The change in the supplemental this quarter is previewing what we expect it to look like pro forma of the the disposition and re-tenanting work to be complete.
Okay. Thank you.
One moment for our next question. Our next question comes from David Rodgers with Baird. Your line is open.
Yeah. Good morning out there. Dave, maybe you could talk a little bit about originating more loans versus acquisitions of your more traditional product. Obviously, that was skewed one way in the quarter and year to date. How do you view that with this emerging acquisition pipeline? Are you still balanced between them or how are you leaning, I guess, at this point in time?
Yeah. I think we're always leaning into the traditional acquisitions. Those are our bread and butter. That's our mandate. That's our real long-term growth. This year, lending and debt investments has been great and important avenue for us to put money to work in the absence of those traditional opportunities. And it's also provided us an opportunity to deepen our relationships with some operators that we've admired for a long time or that we already have in our portfolio. As we go forward, though, what we wanna be conscientious of is really what maturity schedule looks like. Because if you have, you know, $50 million coming due in 2027, then you gotta raise $50 million in 2027. Once you've done that, you haven't grown, you've kind of been on a treadmill.
We kind of view the debt strategy for us as primarily important for relationship building and continuing to be the strong operators that we like and wanna support in their ability to, you know, improve the sector. As we move forward, though, you know, we wanna always prioritize long-term over debt. We'll just keep in mind as we have other opportunities to put money to work. Right now, the terms as to what we've done, we've got money coming in or money out for debt. We have terms that years, five years and 10 years. There's still, you know, as you look for opportunity to put money to work on that side, that we will, like I said, prioritize the better acquisitions.
Maybe just a quick follow-up on that. I think of late, you've talked about maybe just kinda branching into different product types that would still fit within, like behavioral health and other things. Is that part of this investment pipeline, or is it really the core of what you've historically done that's emerging, where that maybe becomes less relevant?
Currently, on the 125, I don't think that there's any healthcare in there today, but when we do quote it, now and in the future, we will be including those types of investments, a pipeline. We do expect to pursue real healthcare investments. We would like to grow that. I'd say we're kind of in the early innings of putting that operator together and skilled nursing and seniors housing having a great bench of ops will be critical to be able to grow that, for us.
Thank you.
Thank you.
One moment for our next question. Our next question comes from Daniel Bernstein with Capital One. Your line is open.
Hi. I guess I have another follow-up on the pipeline as well. Just trying to understand maybe a little bit where the opportunities are coming from. Are they coming more from your existing operators or it's, or kind of what you alluded to with the tightening lending standards or lending market that, you know, you're having a bunch of new potential relationships coming your way?
Yeah, I think it's brokers that we've worked with in the past or other buyers that we've worked with in the past, as well as operators that are bringing us opportunities. It's not really one, you know, kind of subset of, it's really kind of everybody. That's an answer to that, Dan.
It's, you know, I think years we've tried to be the best transactional partner we can, and in some instances, maybe, you know, maybe there is a need for us just to ride shotgun on a transaction if the building in some instances is pretty early and get to underwrite and, you know, have a little bit more time to hiring everybody at their facility, seniors housing operator, the historical rates before the big spike. While it's still elevated, I think we're starting to see some signs that wages are moderating again.
Okay. That's all I have. Thanks a lot.
Thanks, Dan.
One moment for our next question. Our next question comes from Tayo Okusanya with Credit Suisse. Your line is open.
Yes, good afternoon, everyone. A couple of quick ones from me. The first one is, you know, well, you know, we all realize that there's still a lot kind of going through a transition right now. Again, some of your peers that have gone through similar things, and I think, you know, some of them have kind of given us some sense of kind of net-net what the impact is of what they would, you know, to their revenues from the expected combinations of sales and retenanting at kind of new rents. I mean, are you guys at the point where you can kind of provide some color in regards to that when this is all kind of said and done?
My sense is that we'll be in a position to do that on our next call. At this point, I think it's just a little bit premature. I think compared to our peers, it's probably fair to say that we started this process of asset management and so a little bit of a tough apples to apples comparison. As soon as we can, which I think will be next quarter, we'll be able to give you a little bit more than we have so far.
Fair enough. And then, stripping out the 27 assets and taking a look at the sub, you still have, you know, a handful of tenants where the rent coverage still kind of sits at or below 1x. You know, some of the opening remarks you made were helpful. I guess at the end of the day, how do you look at those few tenants relative to, you know, your outlook both for skilled nursing and seniors housing?
Yeah. As you look at the supp, you definitely see a handful of owners that don't have the coverage that we would like to see. I think one thing I would point out is the timeframe here is through March of this year, which really reflects some of the hardest hit quarters and periods for our operators as it relates to COVID and the labor market and all of that. It is a pretty tough period to look at. I think historically back at that period is maybe the toughest for our operators. If you look...
If you drill down at the individual operators in our top ten, what I can tell you is that based on our ongoing and regular conversations with them, and what I would characterize as a very healthy and positive and transparent relationship with each of those folks that are in our top ten, we really have concern about default in the short term. If you look down at the all other tenant list, you see, looking at the EBITDA coverage, excluding HHS funds, 0.99x for all other tenants. A little bit of color on that for you, Tayo, is if you, if you take out just one operator who actually has negative coverage, that 0.99x goes to 1.75x, and the total portfolio coverage goes from 2.02x in that column to 2.11x.
Now, that other operator is part of the 32 assets that we've talked about something with. Although we talked with them about pursuing that early on in the year, they are working through a turnaround plan and are current with rent and continue to show tenants. That's some color on our-
Gotcha.
Our coverage slide.
Okay. That's actually very helpful. One more if you could indulge me, please. The color you guys give about the debt markets getting tougher kind of gives you some advantage on the acquisition side. I mean, on the flip side, again, it also kind of takes a bunch of sellers out of the market, and you guys are trying to sell, you know, a sizable portfolio. Again, curious if that's part of what's causing this dual track issue, number one. Number two, how do potential sellers out there go about underwriting.
A little bit better of a story from an acquisition perspective with the new operator coming in than an existing operator trying to sort of recap their own debt. I think you're right that, you know, the market is moving, but I think the advantage in some of these asset sets, you know, maybe aren't performing where, you know, they can or could, lenders are, you know, willing to take a chance and bridge an operator who's had a track record and has had, you know, some momentum in a particular market.
Great. Thank you.
Thanks, Tayo.
I'm not showing any further questions at this time. I'd like to turn the call back for any closing remarks.
We really appreciate the support, the time, the interest, and if you have any follow-up, you know where to find us. Have a great week.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.