Good day, and thank you for standing by. Welcome to the CareTrust REIT Q3 2021 earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. I would now like to hand the conference over to our speaker today, Lauren Beale, CareTrust Senior Vice President and Controller. Thank you. Please go ahead.
Thank you and welcome to CareTrust REIT's Q3 2021 earnings call. Participants should be aware that this call is being recorded and listeners are advised that any forward-looking statements made on today's call are based on management's current expectations, assumptions and beliefs about CareTrust's business and the environment in which it operates. These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financing and other matters, and may or may not reference other matters affecting the company's business or the businesses of its tenants, including factors that are beyond their 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 and are encouraged to review CareTrust's SEC filings for a more complete discussion of factors that could impact results, as well as any financial or other statistical information required by SEC Regulation G. Except as required by law, 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 in place of GAAP reports.
Earlier this morning, CareTrust filed its Form 10-Q and accompanying press release and its quarterly financial supplement, each of which can be accessed on the investor relations section of 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 Operating Officer, Bill Wagner, Chief Financial Officer, Mark Lamb, Chief Investment Officer, and Eric Gillis, Senior Vice President of Portfolio Management and Investment. I'll now turn the call over to Greg Stapley, CareTrust REIT's Chairman and CEO. Greg?
Thanks, Lauren, and good morning, everyone. Last quarter, we were concerned about the near-term effects of the rising wave of Delta variant infections and the possibility of a stall in the census recovery that was just getting underway. Fortunately, those concerns were short-lived and we can report the occupancy gain has steadily continued in most markets, with a few facilities actually having fully recovered in census. While we're still far from pre-pandemic occupancy overall, the continuing trajectory of the census recovery is consistent with our expectations so far. These gains on the census and revenue front are welcome news, but only half of the equation. The shortage of qualified workers and the sharp rise in labor costs is a growing challenge, especially as patient and resident census rises. Several of our tenants report turning some patients away simply because they lack the necessary staff to care for more.
In spite of the challenges still facing both the skilled nursing and seniors housing industries, pricing for assets and skilled assets in particular, has been unusually strong. As Mark will explain more fully in a moment, our disciplined underwriting approach is dictating that we forego some opportunities while we wait for pricing to rationalize. When that happens, and it always does, eventually, we expect to benefit from having lots of dry powder on-hand. We believe that the value of that discipline is more evident than ever in our portfolio today. With the exception of one small short-term deferral, our tenants have been able to pay their rents right along this year despite the effects of the pandemic.
While the industry is not yet out of the woods, I would be remiss if I did not note for the record that we do see some encouraging indicators of strength emerging in our portfolio independent of the provider relief. Dave will talk more about that in just a moment. That said, we're very pleased with the quarter. We posted double-digit normalized FFO growth of 13% over the same quarter last year, and normalized FAD growth of 15.1%. We collected 96.2% of contract rents in Q3 and 96.1% thus far for October, with the shortage being the one deferral that we disclosed last quarter, which we still expect to collect by 12/31 to bring us to 100% of rents due thus far this year.
We grew the portfolio with $32 and a half million in new investments in the quarter, bringing our total capital deployment this year to over $184 million, and if things come together as planned, we're maybe not quite done. We paid down a revolver following the acquisition and held leverage steady at a comfortable net debt to EBITDA of 3.7 times at quarter end. As Bill will discuss in a moment, we are raising our 2021 guidance today. To cap it off, we got together with most of our operators last month at our annual operator conference, which was held in person here in Laguna Beach. I think it left everyone who came really invigorated and better prepared to tackle whatever comes next.
We are constructive on the long-term future of our portfolio, and CareTrust remains well positioned to continue pursuing our mission of pairing great operators with meaningful opportunities to transform individual opportunities for the better. With that, I'll turn it over to Dave. Dave?
Thanks, Greg, and good morning, everybody. Let me begin this quarter by thanking all of our skilled nursing operators for joining us at our recent annual operator conference that Greg just mentioned. Speaking for all of us at CareTrust, bumping fists, hearing real-time updates from Mark Parkinson of the American Health Care Association, and sharing best practices for a few days was incredibly energizing and informative. We're so proud of our association with a group of operators that we consider to be among the best in the country. In the conference, we spent a lot of time sharing what's working best to address the current COVID and labor challenges. Virtually all of our operators agree that their occupancy recovery has slowed because of tight labor.
The flip side of that is that the key for us and our operators is that the question at the beginning of the year about SNF demand has been answered. Demand is high, and the recovery would be much further along if not for the tight labor market. Nevertheless, we're seeing some operators and some facilities hitting either record occupancy numbers or close to them. We continue to be impressed by those who are managing this latest challenge well. Let me share with you just a few examples of the progress we're seeing and hearing in the portfolio, what Greg just referred to as some encouraging indicators of strength. Ensign, our largest tenant, reported four sequential quarters of occupancy growth and enjoys lease coverage north of three times. We cannot overstate how exceptionally well they've performed through this pandemic.
Priority Management Group has grown its occupancy 6.7 percentage points since its low in December. Eduro has improved its coverage during COVID, excluding all provider relief funds. Trillium has slashed agency costs by over $400,000 a month since the summer and staff turnover from 60% down to 20%. Trio Healthcare has vaccinated 100% of its employees and is nearing record high occupancy and skilled mix. Covenant Care slashed agency usage from a February high of around $1 million a month to under $100 a month right now. Momentum created a special secure unit to accept and care for the large county hospital's difficult-to-place patients, growing occupancy and earning some valuable goodwill with their referral sources along the way. Occupancy is 13.5 points higher than last summer. I could go on.
These are the types of successes that we don't get to read about in the news, but are happening throughout the portfolio. Again, let me say thank you to all of our operators and their teams for the extremely heavy lifting they've been doing these last 21 months. These positives don't mean that many of them won't need or benefit from the next round of provider relief funding. We believe all of our operators have applied for phase four, except for Ensign and Tenet, who have not needed or accepted relief funds from the beginning. We'll find out how much the phase four funds extend the runway for each operator as funding amounts are determined and checks are received in late November and December. It's great news for our operators, skilled and assisted living alike, who have needed those funds so far. Occupancy growth will also be critical.
In Q3, our skilled nursing operators reported continued occupancy recovery from the prior quarter, resulting in a projected return to pre-pandemic levels sometime next summer. While just under 20% of our skilled nursing facilities are still operating below 80% of their pre-pandemic occupancy, the majority, almost 60%, are back above 90% of pre-pandemic occupancy. On the skilled mix front, the Delta surge appears to have actually given a balance to some of our operators in the regions most affected. Overall portfolio skilled mix remains about 300 bps higher than the pre-pandemic levels, with the higher reimbursement rates that offset some of the overall occupancy loss. Of course, this projection assumes that qualified labor is available and that no new headwinds, such as a new variant or wave of infections, intervenes.
For seniors housing occupancy, overall occupancy in our relatively small AL portfolio remains unchanged from Q2, in spite of the fact that admissions are significantly up. The treadmill here with AL occupancy is really a result of one of our operators electing to discharge a host of residents for various reasons. Now that that's largely done, we expect to see our seniors housing occupancy begin to recover more quickly from here on. Turning now to lease coverage. With few exceptions, overall coverage remains very healthy, both with and without provider relief funds. A couple of our operators have really needed those funds to extend their ability to survive and ultimately recover from the impacts of COVID. Our top 10 operators coverage, which accounts for over 80% of revenue, continues to be strong at 2.2x for property-level EBITDAR and 2.76x of EBITDARM.
Our relatively transparent coverage disclosure will prompt questions around individual operators. Let me go ahead and address three of them right here. First, last quarter, we talked about Noble Senior Services, one of our seniors housing operators, and their request for some flexibility in paying a few months of rent. You will have noticed both the investment total and rent numbers increased for Noble since last quarter. That is a result of transitioning the second of two Premier facilities to Noble in Wisconsin. Around this time last year, we began talking to Premier about transitioning their two Wisconsin facilities, which were outliers for Premier. Noble's top-performing facility was nearby, and at the time, again, last year, Noble as a whole was performing a little bit ahead of their expectations in spite of COVID. We saw this transition as a win-win for both operators.
The two buildings transitioned this year, the first in March and the second in July, as regulatory approvals were required and took some time. We're happy to report that Noble's admission rates have really picked up lately, but as I noted a moment ago, their discharge rate has also been unusually high, primarily due to an internal review that led to discharging a number of residents that were not best served in their settings. These discharges represented 12.5 percentage points of their overall occupancy. We think that's essentially done now, but of course, it's left a significant hole in their near-term revenues. They hadn't received provider relief funds previously, but they have applied for and expect phase four assistance.
In September, we agreed to defer approximately 90 days of rent under an arrangement for them to pay it all back, plus the rest of their 2021 rent by the end of this month. Their obligations under the agreement will be funded from their proceeds of our pending acquisition of their 2 memory care facilities in New Jersey. That arrangement, which is only dependent now on the imminent receipt of regulatory approvals, appears to be on track. After that, they still have a ways to go to get to positive lease coverage, but the phase four Provider Relief Funds and other government assistance will be immensely helpful in the meantime. Perhaps more importantly for the long-term, as I noted, we believe that the discharges are over now, and with the increasing pace of admissions, their occupancy numbers should finally get some traction.
Second, Covenant Care is a SNF operator whose month-over-month occupancy and coverage is actually trending really positively in recent months. We're in a minority piece of their overall portfolio, and the corporate credit is very good as their other facilities are reportedly performing well. We're optimistic that their recovery trend will continue. Finally, let me talk about Bayshire Senior Communities. They're a seniors housing and skilled nursing operator that took over 2 of the 4 beautiful large campuses in California we acquired early in the year, plus another in El Centro, California. The Bayshire team has a positive momentum in those 3 assets, and we expect them to near stabilization soon. We remain very constructive on both the near and especially the long-term prospects for our skilled nursing and seniors housing portfolio.
The combination of steadily recovering census and continuing relief funding, especially for the AL operators, bodes well for them, even though it's no guarantee of success for the most challenged. We will continue to monitor and report. With that, I'll pass the call over to Mark to talk about investments. Mark?
Thanks, Dave, and good morning. In Q3, we executed on a $32.5 million acquisition of 2 skilled nursing facilities in Austin, Texas, that we concurrently leased to operating affiliates of the Ensign Group. The 2 assets are well-located and practically brand new, and it'll be exciting to watch Ensign ramp them up over the coming months. The acquisition brought our total investments in 2021 to $184.2 million. From a market perspective, on the skilled side, we continue to see one-off deals of mostly non-strategic and struggling facilities. As you would guess, deal flow for stabilized assets has been very light, as stabilized assets are understandably harder to come by for the moment.
With respect to value add assets, the ongoing government support of the SNF industry has kept some owners afloat, owners that we would have normally seen selling their assets as property level economics turn negative while they deal with challenges of reduced occupancy and higher labor costs. With stronger than usual demand for fewer than usual assets on the market, pricing for skilled nursing has surprisingly spiked just when you thought there might be a pivot to discount. In fact, on a price per bed basis, SNFs have been trading at all-time high, all-time highs, including many assets with little to no cash flow. In other words, yes, Virginia, there is a Santa Claus for SNF sellers this year. Seniors housing is its own story. There's a large range of assets on the market, from Class A to Class F and everything in between.
A lot of those assets appear to be mispriced as well. Although we have seen a few more reasonable numbers for the mid-market product that we typically pursue, we are looking hard at some opportunities where we think we can get risk-adjusted returns you're accustomed to seeing from us. I would remind everyone that we've consistently reassured the market that at any point in the real estate cycle where pricing becomes unsustainable, we stick to our underwriting discipline to ensure that we keep our portfolio healthy and well positioned for the long-term coverage growth. We continue to tap our extensive industry contacts for appropriately priced opportunities, which is why we've been able to close $184 million in largely off-market deals year to date. As Greg mentioned, there may be more before the year is done.
We will not chase mispriced assets or place our tenants in untenable situations where their rents and the annual escalators will amend their lease coverage to a point that is unsustainable. Looking to 2022 and 2023, the investment sales community continues to express an expectation that a wave of deals will be coming about based on the record number of broker opinions of value, or BOVs, they're being asked to issue by prospective sellers. We can't predict exactly when, but we expect that pricing will eventually settle as the pandemic subsides, supply chain issues are resolved, interest rates rise, and credit standards inevitably tighten. In that environment, we'll be ready to use our consistently conservative balance sheet to grow more aggressively with quality assets in good markets and above all with best-in-class operators.
In the meantime, we continue to eye every deal out there for opportunities that might fit us and our operator partners, and we believe we'll get our fair share of them. Our current pipe sits in the $125 million-$150 million range. The pipe is made up of singles and doubles with a couple of solid smaller portfolio opportunities that we believe are a good fit for our operators. The pipe is split roughly evenly between SNF and senior housing facilities. Please remember that when we quote our pipe, and when we 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 in a relatively near term. Now I'll turn it over to Bill to discuss the financials.
Thanks, Mark. For the quarter, normalized FFO grew by 13% over the prior year quarter to $36.7 million. Normalized FAD grew by 15.1% to $39 million. On a per-share basis, normalized FFO grew by 11.8% over the prior year quarter to $0.38 per share, and normalized FAD grew by 11.1% to $0.40 per share. Moving on to guidance. We plan on issuing guidance for 2022 when we release 2021's year-end results. For the remainder of 2021, we are raising our previously released guidance by 1 penny on the low- end of the range to normalized FFO per share of $1.49-$1.50, and normalized FAD per share of $1.58-$1.59.
This guidance includes all investments and dispositions made to date, a share count of 96.5 million shares, and relies on the following assumptions. One, no additional investments, dispositions or rent deferrals, cuts or reserves, nor any further debt or equity issuances this year. Two, inflation-based rent escalations, which account for almost all of our escalators at an average of 2%. Our total rental revenues for the year, again including only acquisitions made to date, are projected at approximately $186 million, which includes less than $40,000 of straight-line rent. Three, interest income of approximately $2 million. Four, interest expense of approximately $23.8 million.
In our calculations, we have assumed a LIBOR rate of 15 bps and a grid-based margin rate of 125 bps on the revolver and 150 bps on the unsecured term loan. Interest expense also includes roughly $2 million of amortization of deferred financing fees. Not included in interest expense was the $10.8 million charge that we recorded in Q3 related to our Q2 bond refinancing. The $10.8 million was made up of $7.9 million of redemption fees and a $2.9 million write-off of deferred financing fees. Five, we are projecting G&A of approximately $19.6 million-$21.5 million. This range is consistent with what we discussed last quarter. Our G&A projection also includes roughly $7 million of amortization of stock comp.
Our liquidity remains extremely strong with approximately $23 million in cash, $520 million available under our revolver, and we produced roughly $12 million in cash per quarter after paying the dividend. Leverage also continues to be strong at a net debt to normalized EBITDA ratio of 3.7x today. Our net debt to enterprise value was 25.1% as of quarter end, and we achieved a fixed charge coverage ratio of 8.5x. Lastly, cash collections for the quarter came in at 96.2% of contractual rent, and October came in at 96.1%. I would expect November to be much like October based on the color given today on this call. As Greg mentioned, we do, however, expect to collect a shortfall before year-end. With that, I'll turn it back to Greg.
Thanks, Bill. Everyone, we hope this discussion's been helpful for you. We certainly appreciate your continued interest and support. With that, we're happy to open it up for questions. Sadie?
Yes, sir. Ladies and gentlemen, if you would like to ask questions, please press star and the number one on your telephone. Again, if you would like to ask questions, press star one on your telephone. We'll pause for just a moment to compile the Q&A roster. For our first question, we have Juan Sanabria from BMO Capital Markets. Juan, your line's open.
Hi. Thanks for the time. Just hoping to spend a little bit more time on Noble. The two assets that you guys are moving, just curious on if those were EBITDA negative and/or coverage enhancing for Noble and/or is the rent that's staying with those assets staying in place with Noble? Or just curious on how we should think about that and/or the risks for rent on those two assets being lower than what was subscribed to it under the prior lease? Just a little bit more color on that piece would be helpful.
The buildings were not covering, so they were under 1x coverage. Sort of chronic underperformers for Premier. One of the things we really liked about putting them into Noble's hands last year when we were looking at it was that Noble's, say, their top performing facility is in Wisconsin, nearby to these 2 Premier assets. They're our strongest local leader and most consistent operator. This created the opportunity for them to build on that strength, form a nice little cluster.
We felt like it gave those two buildings a better chance to get back to stabilization than they were. Premier agreed. The rent came over at the same amount to Noble. There's some work to do there to get those, you know, to be performing. Since the transition happened, they have, under Noble's care, improved slightly on a coverage perspective, but they still have some ways to go to get north of one times coverage.
Okay. Just to clarify, there's not assets being taken out from Noble to be given to a new operator? I was just reading over the 10-K and I was a little confused about maybe another two groups of assets or are those the same two assets?
Yeah. There's two groups of two assets. I understand why there's some confusion. The reason why I talked about these two Wisconsin buildings that were added to Noble is to address the question of why Noble has actually increased in investment size and rent in terms of our relationship with them. It's because of that, because they took over those two assets from Premier that we started negotiating last year and then has finally took place this year. The other two assets that we've been talking about for Noble, one is a building in Fort Myers, Florida, which has been offline since they stepped into the lease back in 2019 for major renovations and getting that back ready to go. That's still a ways out from being ready and licensed.
The other one is a building in Baltimore, Maryland, that's actually being actively marketed right now for sale. Those are probably the other two buildings that you're thinking about from the queue.
Once those buildings are carved out, is that coverage enhancing or do you have a sense of what the pro forma coverage would be just to give us a pro forma type number?
I don't have a pro forma number at my fingertips, but I absolutely. When Fort Myers is removed and Baltimore is removed, those will be significantly coverage improving for Noble.
Okay. Just switching gears to the pipeline. What gives you the confidence, I guess, that the prices won't stay where they are, cap rates lower or price per unit is high, and that we've seen significant cap rate compression in other asset classes with low rates and who's to know where interest rates go. Just curious if on what you see changing or what you think you're not willing to match versus some of the other buyers out there in terms of risk underwriting. Is it just the speed of the recovery or is it the underlying value of the assets that may or may not change? Just curious if you could provide a little bit more color on that.
Well, I think this is Mark. You know, I think just talking to the investment sales community and understanding that eventually the spigot's gonna get turned off. I think we feel like pricing at some point will rationalize. I think over the next probably 12 months we'll start to see more and more opportunities. Am I answering your question? Is your question why we think pricing will go south?
Yeah. Yeah. Why will it normalize and/or where are you different, I guess, in the underwriting versus the people who are winning the bids? Is it just they're more aggressive on the timeline of a recovery or just are placing a greater value on the underlying real estate and ops?
You know, I think the folks that are winning bids are making some assumptions on certain states, specifically states that have CMI-based Medicaid rates and are assuming pretty aggressive increases in Medicaid rates. That's not something that we're necessarily willing to underwrite going in the door. What operators can do day one, you know, whether there's certain insurance costs, or you know, kind of very easy low hanging fruit day one changes, we'll take those into consideration. Getting on an operator to increase their CMI, which then increases their Medicaid rate, which would increase coverage, there are some nuances to that that you know don't give us a whole lot of comfort. There are operators that are willing to take that risk and commit to moving off of those assumptions.
Thank you.
Sure.
For our next question, we have Jordan Sadler from KeyBanc Capital Markets. Jordan, your line is open.
Thanks. Good morning, guys. Wanted to just dig in a little bit more on Noble. Dave, it seems like there's a third group of two assets, which are the two assets that you'll be purchasing in New Jersey, the memory care asset. Just to make matters more confusing on the pair. Can you give us a little bit more color on those two assets and how that transaction is going to come into the fold? How much, maybe how much you'll be paying and what the valuation will be?
Yeah. Those two assets are owned by Noble. There's just one last regulatory hurdle to pass, and then we can execute that purchase. Which we think we'll do in this month if all goes according to plan. Those are two about 40-45-bed facilities for memory care in New Jersey that have been empty for quite some time, being renovated. They have been renovated. We'll probably, once we acquire them, put a little bit more into it to get them really beautiful and ready to go. The process in New Jersey takes a little bit longer than other states to get licensed once you have Certificate of Need.
We're likely gonna start collecting rent on that sometime in first half of next year, hopefully Q1, but sometime in the first half of next year. We are likely gonna have a different operator run those than Noble. We are currently marketing the facilities, having really good conversations with a host of interested operators. We're gonna be touring the facilities with them soon, and we have some time because of licensing to get that lined up, but there's been a lot of interest in them for operators that are already in and around New Jersey. The purchase price on that is around $12 million for those two buildings.
Then you'll put in how much additional?
TBD, but probably under a quarter million dollars.
Oh, small amount. Okay. Those will be leased to somebody else at a yield that we would expect.
Yeah.
To get from you guys.
That's right. Most likely.
A ramp.
because they're empty, there's gonna be a bit of a ramp in that rent. Once they get stabilized, then we'll land at sort of that normal yield that you expect from us.
Okay. Just clarifying on the two that are, well, you know, Baltimore and Fort Myers, it sounds like Baltimore will be sold. I'm curious there, what the sale price might be and then how the rent credit, like, what the rent credit would be on a yield basis relative to the value back to Noble. Maybe if you could clarify what's happening with Fort Myers.
With Baltimore, we will find out what the market says about the price for Baltimore. I don't wanna whisper a number to the market while it's being actively marketed at this time. But we will take those proceeds and hit it with what you might expect a rent yield to be for that and adjust the rent accordingly. In Fort Myers, there have been some. Since that building went through a full renovation, as it's gone through licensing with the fire authority, they've discovered some shortcomings that they'd like us to shore up before we reopen it. They're pretty extensive, so that's what's caused the delay there. We have our director of construction services has been boots on the ground there very recently talking face-to-face with their fire authority in collaboration with Noble to try to move that along.
Okay. That's helpful. Hey, last one. Maybe get Mark in the conversation here. It sounds like you're not closing the door on the $250 million-$300 million of acquisitions you guys have done historically. So a little bit of a ways to go. Is that the right cadence we should be coming away with?
You know, yeah. I mean, it's obviously getting late in the year. I mean, I think what we have kind of teed up in the pipeline, I don't think it's gonna get us quite, you know, maybe the historical number that you saw pre-COVID. What we do have in the pipeline, we're pretty excited about. It'll just be a function of, you know, how quickly we can get through diligence and get operators signed up.
Okay. Thank you.
For our next question, we have Amanda Sweitzer from Baird. Amanda, your line is open.
Great. Thanks for taking the question. Hopefully, last follow-up on Noble here. Do you know if Noble currently has any debt against the two assets that you're acquiring that they need to pay off? Or should we really think about that purchase price for those assets as a one-for-one cash infusion for Noble?
They have some debt that will be paid off from the proceeds, and the largest amount of the proceeds will go toward paying off the deferral and prepaying rent and other obligations for us.
Okay. That's helpful. On staffing for the operators that you mentioned where you are seeing those lower agency costs? Are you also seeing less occupancy restrictions, or are those operators generally trading agency labor for full-time staff and are still then facing staffing constraints overall?
Thanks for asking, because I think it gives me a chance to correct something. When I was talking about Covenant Care, somebody nudged me here at the table and said I said that their cost went from $1 million a month down to $100 a month, but it's really $100,000 a month for Covenant Care. As it relates to our operators in general, most of them are saying that there's some limitation on how much they can admit for the skilled side, not so much for the seniors housing side, but for the skilled side, because of tight labor. There's really two ways to approach that. You can continue to admit and staff with agency, which takes a big cut to your margin.
You can stay with lower occupancy and keep agency out. We have operators that are basically approaching it in both of those ways. There's pros and cons to both of those approaches. I'm not sure if that answers your question, but that's how they're approaching it now.
No, that's helpful. Last question. Following up on your senior housing portfolio and some of the improved trends you're seeing there, can you quantify how big the occupancy uptake is that you've seen quarter to date?
Unfortunately, I can. Seniors housing occupancy quarter -to- quarter really has remained flat.
Appreciate the time.
For our next question, we have Michael Carroll from RBC Capital Markets. Michael, your line is open.
Yeah, thanks. Dave, can you go back and talk a little bit about the internal review that you were highlighting about Noble? I guess, what drove that internal review and where were those residents? Where did they move to? What was the better setting?
Well, I think the overall concern was appropriateness of care. In other words, there's really kind of two things, two pools of concern. One was appropriateness of care, and the second was payer source. It's one thing to admit residents, but if they aren't able to pay over time, then you have a problem and you kinda have phantom revenue there. That was an issue. The other was just the appropriateness of care, most common around either acuity or behavior, things like that. What prompted it was management finally coming to grips with some lingering issues and taking a hard look at what they had in their, in a handful of their facilities, really a couple of their buildings, where they had kind of persistent problems.
As they dug into it, they realized that there were collection issues, and those collection issues were not unrelated to some of these behavioral issues as well. Finally just made some policy decisions around the types of residents that they can really appropriately take care of.
That 12.5% drop, was that how many communities within their portfolio? And I guess out of how many within their portfolio? And were they moved to what, behavioral health facilities or skilled nursing facilities or those types of assets?
They would be. I didn't—we didn't, you know, really keep track of where they went, so I couldn't give you specifics on what percent went where. But you're right, that's where people would go or other assisted living facilities that specialize in behavioral type health as well. So within the seniors housing, you have all sorts of specialties. The buildings that they had just didn't have that capability to take care of that population. It was concentrated at a couple of the buildings.
That 12.5% occupancy drop, that was at the whole portfolio or just select buildings?
Their whole portfolio.
Okay. Where is occupancy at for Noble, for their portfolio today?
I think we can get back to you. I might have to get back to you on that one, Mike.
Okay. That'd be helpful. Then can you talk a little bit more about Premier? I mean, I know their coverage ratio has been pretty low over the past few years. I mean, moving those two assets to Noble out of that portfolio, where does coverage ratio go? Is it closer to one times?
Yeah, it is. It's creeping up. You know, we just saw Premier at a conference this last week. Had a really good conversation with them. Have a good relationship with those guys. They're starting to see some traffic pick up in their Michigan portfolio. They expect more move-ins, net increases by the end of this year. They've applied for the phase four funding and rural funds as well. Things are actually a little bit better and stronger at Premier today than they have been in a long time, and removing the two Wisconsin facilities has helped that.
When you say it moved up a little bit, I think it was around 0.8 times last quarter, and obviously they fell out of your top ten, so I don't believe it's in this most recent report, but is it back up to 0.9 times? Or how much does removing those two assets really help them? And can we take them off the watch list? Does it help them that much?
No, I don't think we're gonna probably take Premier off the watch list until they're comfortably north of 1x. They still have a ways to go. I think, you know, their coverage in the quarter was fairly consistent with what it was the quarter before, maybe a little bit down. What I was referring to is more real-time information that we have in Q4, just looking at their occupancy and talking to them about their costs. We expect that it's starting to creep up right now.
Okay. And then just my last question for Bill. Can you talk a little bit about the CPI rent escalators within the company's leases? I believe you have 2% in guidance, and CPI has been well ahead of that. I guess, what CPI should we typically look at for those? And is it above 2% or is that really gonna be a 2022 event versus 2021?
Yeah. Hey, Mike. CPI, most of our leases contain CPIW and CPIU. It is for the last few, and as you know, our leases contain floors of zero and caps. Most of them have caps. Ensign's capped at 2.5%. CPI came in for them above 2.5% on June 1, but we still raised them by 2.5%. The other caps go up to, like, I think it's 3.5, and CPI has been well above 2.5. So our assumption of 2% in guidance for the rest of the year, which we only have a few tenants with bumps in Q4, isn't really material if it goes from 2%. If I use 2% or 2.5% or 3%.
Okay. If we're looking to 2022, it's safe to assume that we're probably closer to that 2.5 range given where CPI has trended.
Correct. Yes.
Okay, great. Thank you.
Mm-hmm.
For our next question, we have Steven Valiquette from Barclays. Steven, your line is open.
Hello, everybody. Thanks for taking the question. Actually a couple questions here, really on the decision by Ensign Group, an announcement from a week or two ago about starting a captive REIT within their company. Yeah, I guess for the near term and long-term, maybe just break up the questions that way. I guess I'm curious in the short-term, you know, will this slow down the pipeline of deals that you've done with them? You know, I mean, they had a lot of positive comments on their call about, you know, continuing to do, you know, transactions with, you know, existing REIT partners, et cetera. Maybe I'll just, you know, pause for a second, get your high-level thoughts and ask a few follow-ups on this topic as well.
Let me just start, get your thoughts around any implications for you guys short-term or long-term, and then we'll go from there. Thanks.
Sure. This is Greg. Look, I don't think it changes things very much for us. We have a good relationship with them, and you saw it in our deal with them in the quarter to do the two Austin facilities. In that case, we brought those facilities to them, having tied them up previously, and I really think that's probably the only way that we would be doing deals with Ensign in the future. It's really the only way we've done deals with them. Their cost of capital has always been good enough. Their availability of capital has always been good enough that if they found a deal, they could finance the deal, and they've done their own deals, and they've done them very, very, very well.
That said, you know, with their captive REIT, I'm not exactly sure what they're going to be looking at. If they continue to look at the same kind of distressed assets that have been their bread and butter historically, I don't think there's gonna be a ton of overlap. To us, they really just represent, you know, another player in a large marketplace with lots of players that we compete against. I don't think we're too worried about whether we will get our fair share of the deals. Does that answer your question?
Yep. Yeah, it's helpful. Maybe just two quick follow-ups on this same subject. One of them you sort of half-answered already. If we look at Ensign Group and Pennant combined, I think your total number of properties combined back in 2014 was 94, and that would be, you know, 106 currently between the two. If you've added a couple of properties per year under that combined relationship, it sounds like you were bringing those properties and transactions to them as opposed to the other way around. It's something going forward that that'll still be the case based on what you said. I just wanna confirm that.
Yeah. Actually, what happened was, we bought a four-building portfolio with an Ensign lease in place last year, and then we did this deal with them this year. I can't think, Mark, have we done anything else with them?
Covenant Care tack on.
Oh, we bought—we did a Covenant Care tack-on with a building with them. Again, a building we brought to them.
They grew a little bit when they acquired Five Oaks, which is a smaller operator of ours.
That's right. They bought one of our operators and just stepped into the lease that was already there. Those are the kind of deals that we do with them. Again, you know, they're a great operator. They have superior cost of capital and if they source a deal, they're gonna do that deal themselves every time. I would.
Okay. Just a sanity check on just the expiration date of your master lease with Ensign Group right now and then. I mean, you own the real estate, so I'm guessing there's really no risk of losing any of your current lease property arrangements with them. Maybe just long-term, is there something. Do we assume that's all, you know, would stay in place, you know, for long-term or is there risk on, you know, long-term that something changes as far as the the size of the relationship on that existing-
Yeah, that's a good question. I'm glad you brought it up. It gives us a chance to remind everyone that when we set those leases up in 2014, there's 8 master leases, and they all have staggered maturities with various, you know, 2- to 3-, 5-year extension options that Ensign can exercise. They are all well diversified in terms of geography, asset class, and asset quality. That was done so that we would be able to have the expectation that there's a very high likelihood that those will be renewed as those renewal options come up.
Okay, one last real quick one. Did you know that this strategy was coming from them for a while, or is this maybe, you know, catching you by surprise a little bit as far as their decision around this? Just curious if you have any high- level response to that.
No, I don't think anybody should have been surprised. Ensign has been telegraphing to the market literally for years that they wanted to do something like this, without saying exactly what it was going to be. I think everybody's known that they have a sizable real estate portfolio that they have built since the 2014 CareTrust spin off. They've done a terrific job with it. I think it's a good, solid, logical step for them in terms of just making sure that they get credit for the value of the real estate equity that they continue to create and build up in that portfolio, just as they did with the portfolio that we started with. They're doing a great job.
Got it. Okay, that's all very helpful. Thanks.
You bet.
You bet.
For our next question, we have Daniel Bernstein from Capital One. Daniel, your line is open.
Hi, thanks for taking my calls here, my questions here. I wanted to go back to the skilled mix that you noted has been increasing. I wanted to kinda understand a little bit more about how you think about the sustainability of that increase in skilled mix, and maybe how much of that was related to maybe PDPM versus the uptick in COVID in 3Q.
Hey, Dan. You know, I'm not sure that we could attribute the skilled mix increase or decrease or any movement there to PDPM necessarily. We've always compared the numbers pre-pandemic to post, and we had about six months of PDPM in those pre-pandemic numbers. Roughly, we're at about 15.5% for skilled mix on our skilled nursing portfolio for pre-pandemic. We've seen it go as high as 25.5% in December of last year. It kinda came down to in June, a high 16% and slowly eked back up to a September number of 18.5%. I think that's largely because of the Delta variant. We'll see. You know, a lot depends on how long the three-day qualifying stay waiver stays in place.
We think that is a key element, of course, to these numbers. Whether or not that is a permanent change, you know very well is anybody's guess, but probably not something that is worth putting a lot of money on. I think when the dust settles on COVID and we can say that it's far in the rearview mirror, we probably get back down somewhere closer to those pre-pandemic skilled mix levels.
Okay. All right. On the pipeline, you know, obviously with some of your operators and the high lease coverage, and you know, Ensign giving back PRF funds, they don't need that. It seems like maybe from an industry level, the industry continues to need continued PRF funds or other federal and state support. Is that kinda playing into the idea that you're gonna get a pickup in acquisitions and better pricing down the road that, you know, that funding maybe goes away next year, and then maybe we'll see some more distress, or I don't know if distress is the right word, but you'll see more assets come to market where operators need financing or a way out financially.
Dan, this is Mark. Yeah, that's exactly, I think the way we view it. You know, we've already seen some smaller operators hedge with Hillstone. We're currently working on a transaction
Right now, that was the case. We closed the deal on El Centro earlier this year with Bayshire for the same type of situation. Yeah, I think when the PRF funds get turned off, when the public health emergency eventually expires, FMAP funding stops flowing, then I think we'll start to see a significant amount of transactions come to market. I think at that point, supply is going to outstrip demand, and I think that's when price per bed will start to fall.
Okay. One last question on the labor side. I think you noted, maybe some easing up of the labor pressures at some of your operators. Is that a matter of increasing wages or are they actually seeing increased job applications, more people coming back to the market to work? I'm just trying to understand maybe the dynamic there that's giving you some green shoots on labor.
Dan, it's really a combination of both. We do see higher wages across the board to very varying degrees. On the other hand, with the unemployment benefit lasting and people kind of burning through their savings from COVID and you know, there are people coming back to work as well. What we've seen is in the operators that have had the most success, it's those who bring that same tenacity and follow-up and prompt response that they have around admissions from the hospital to applications. You combine that tenacity and intensity with a focus on culture and providing a great place to work and we do see operators that are able to move the dial in a significant way in the face of an otherwise difficult macro environment.
Okay. Better operators are having better performance, I guess, or better less issues on the labor side, all things being equal?
Yeah.
Are the better op-
Go ahead.
I was gonna say that's all the questions I had, but.
Okay.
Again, participants, if you would like to ask a question, please press star one on your telephone. For the next question we have from Jordan Sadler from KeyBanc. Jordan, your line's open.
Hi, guys. Just a quick follow-up on the repurchase options and then maybe looping in just as a reminder. Does Ensign do any of the Ensign properties have repurchase options or any of those net leases rather?
No, just the Texas 4 that we acquired, but none of the original properties.
Can you remind us when the Texas four opens up?
2027.
2027. Coming back to purchase options, the disclosures on page 13 of the deck. It looks like the first group of purchase options are probably with Noble, I'm guessing, just 'cause it's. It says one of the properties is held for sale at September 30. Is that sort of the right assumption? Because I would assume if that were the case, it'd be unlikely they'd be exercising. Is that fair?
That's fair. Yeah, we think it's pretty unlikely at this point as well.
Okay. Then the next couple down on that list are SNFs. One opens up January first, and that's kind of a bigger chunk. Can you share who that is and what the expectations are around that?
Jordan, let me correct what I said about the Texas four with Ensign. That's actually that option opens at the end of 2024. Then the next guy in line is a SNF operator in the Midwest. We also, based on their current performance, would say that it's pretty unlikely that they are in a position to exercise. You know, we can't know for sure until we get closer.
Can you share what the cap rate is on that, the fixed cap rate on that lease revenue? Can you share what that is?
I don't.
It's at 6.7.
Yeah. Let's see. Let me get back to you on that, Jordan.
No worries. Thanks, guys.
For our next question, we have Stephen Manaker from Stifel. Your line's open. Steve, your line's open.
Looks like Steve's off. Is there anyone else, Sadie?
We don't have any further questions at this time. You may continue.
Great. Thanks, Sadie. Well, thank you everyone once again for being on today. If you have additional questions, you know where we are. We're happy to engage any time, and we look forward to hearing from you and hopefully seeing you at conference soon. Thanks, everyone.
Ladies and gentlemen, this concludes today's Conference Call. Thank you all for participating. You may now disconnect.