CareTrust REIT, Inc. (CTRE) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the CareTrust REIT Third Quarter 2020 Earnings Call. [Operator Instructions]. I would now like to turn the [indiscernible] this conference call. Lauren Beale, you may begin.

Thank you, and welcome to CareTrust REIT's Third Quarter 2020 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, financings 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 statement 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 F-A-D 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 reports. CareTrust yesterday 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. Management on the call this morning include Bill Wagner, Chief Financial Officer; Dave Sedgwick, Chief Operating Officer; Mark Lamb, Chief Investment Officer; and Eric Gillis, Vice President of Portfolio Management and Investments. I will now turn the call over to Greg Stapley, CareTrust REIT's Chairman and CEO.

Thanks, Lauren, and good morning or good afternoon, wherever you are, everyone. Q3 ran pretty much according to script. Solid rent collections, improved testing capabilities, declining mortality rates and improving skilled mix to offset continued weakness in census. Anecdotally, day-to-day, the operations seem much more stable than they were initially. And we believe that seniors housing and skilled nursing industries are far more prepared to handle the third wave than they were 6 months ago. Engaging their near-term prospects, we have dug into the operational analysis of our portfolio at a more granular level than ever to understand and project how our tenants are likely to fare in the coming months under a variety of possible scenarios. We are pleased to be reporting, and we gave you some new data points to help you understand this in our supplemental yesterday that the HHS provider relief funds appear to be providing our skilled nursing operators with enough runway to continue operating comfortably for the next few quarters while vaccines through therapeutics and other mitigating majors roll out. We have expanded and enhanced our lease coverage reporting in order to show you exactly how these operators did in Q2, which was the first full quarter of pandemic impact, both with and without provider relief funds, and we continue to track both metrics on a month-by-month basis. Now there are a lot of ways to calculate the impact of the relief funds on financial performance and operator health and different operators are doing it very differently. But our methodology for estimating the amount of relief funds to showing the with relief funds coverage number is very conservative. We spread all receipts to date ratably over the 15-month period from last April to next June 30. We used that period because June 30, 2021 is when providers hit beat, use it or lose it point under current HHS regulations. Those regulations incidentally have been pretty fluid to date. A number of the deadlines announced by the government in connection with stimulus programs have been pushed out sometimes repeatedly. At present, with over $30 billion in Cares Act funding still unallocated, we expect, but we're not projecting or counting on. We expect some additional relief funding as well as possibly some additional time to use the funds as the pandemic plays out, but we will stick with our conservative measurement methodology until the announced ground rules change. So bottom line, we see several more quarters of fairly predictable and manageable operating performance, especially if the promised vaccines are effective and rolled out quickly. And we also see a path to a soft landing for most operators if we get into an extended recovery. We will continue to advocate for our health care providers as the pandemic continues to unfold, and we intend to continue providing you with as much meaningful data and transparency about them as we can. As for CareTrust, I'm pleased to report that we remain in great shape. From April through October, we collected over 98% of rents and with the exception of 1 small seniors housing tenant, November rent collections are on track and continuing to come in as expected. With nothing drawn on our revolver and $25 million in cash on hand, we have the lowest leverage in company history today at less than 3x net debt-to-EBITDA at the moment. Interest costs on our floating rate debt are at historic lows, and we have no debt maturities on the horizon before 2024. We were also able to post a modest external growth in the quarter despite the pandemic and the challenges that it imposes for underwriting, and we've grown our pipeline despite the disruption in M&A activity in our space since April. Finally, we're raising and narrowing guidance for the year from our previous normalized FFO per share of $1.32 to $1.34, a normalized FAD per share of $1.38 to $1.40 to our now projected normalized FFO per share of $1.36 to $1.37 and normalized FAD per share of $1.42 to $1.43. Finally, just looking forward, we feel good about our prospects for both collections and external growth over the next 3 quarters or so, which is about as good as our crystal ball ever gets, and we see great potential for a great 2021. So first, I'll turn it over to Dave for some more color on what's happening out there, then Mark will jump in with acquisitions, and Bill will finish off with the financials. Then we'll open it up for Q&A. Dave?

Thanks, Greg. Good morning, everyone. I ended last quarter's call with some milestones, we would be tracking to measure progress towards turning the corner on COVID. So let me start there with my comments today. First, clinical capability. Both testing and treatments have improved dramatically since the beginning of the pandemic. Furthermore, most operators have now adapted to the COVID environment and largely put the initial disorientation and distress of the pandemic behind them. The second milestone we monitor closely is government funding. After 4 rounds of announced funding, skilled nursing operators are in fairly stable shape and seniors housing operators have recently been given another chance at applying for funds. The third milestone we're watching is hospital volumes. Both through the emergency department and electric procedures returning to pre-pandemic levels. Due to the fluid nature of the virus, recovery of hospital volumes has been limited and idiosyncratic so far. We expect hospital volume to ebb and flow by markets depending on the continuation of future waves of infection. And fourth and finally, the milestone, of course, is the vaccine. And we're encouraged by the aggressive efforts by industry and the FDA to bring an effective vaccine to market in record time. We're pleased to see the prioritization of nursing homes and seniors housing settings in those discussions. It is really good to see some genuine progress on several fronts. Next, let me turn to occupancy. I'm pleased to report that from March through October, seniors housing occupancy in our portfolio has held steady compared to skilled nursing and the seniors housing sector at large. Overall, we did see a minor 100 bps drop in seniors housing occupancy over the last few months compared to June. Individual facilities have declined, while others have actually gained occupancy this year. It's been impressive to see a couple of our seniors housing operators actually perform better during the pandemic than before. For skilled nursing, not including Ensign, our overall occupancy has dropped 710 bps or roughly 9% from March through October 31 but the higher-margin skilled occupancy has increased 480 bps or almost 31% over the same period. The additional skilled revenue provides a meaningful partial offset to the overall occupancy loss and increased expenses associated with COVID. Now I'd like to talk about the government relief funding and our reported lease coverage. We're grateful and applaud the federal and state governments for providing the level of support that they've given to the sector thus far. Some operators have desperately needed the funds to bridge them until their fundamentals recover. Other operators have benefited from the security the funds provide in a very uncertain time, and a couple of our operators have actually returned the funds all together. The question on everyone's mind is do the HHS funds provide a sufficiently long bridge for operators to manage through until pre-COVID operating conditions return? In other words, where is the risk in the portfolio? Traditionally, TTM lease coverage has been the primary bellwether to assess risk of master lease rents. Last year, we increased visibility by disclosing EBITDAR and EBITDARM lease coverage by operator for our top 10 tenants who account for roughly 80% of our revenue. Because of COVID and the HHS relief funds, reporting a meaningful coverage number for you became a real challenge this time. This challenge is magnified by the fact that there is no uniform methodology for operators to account for their provider relief funds. Resulting in some applying large amounts right away and others taking a wait-and-see approach. So simply reporting coverage based on the financials as reported by our operators would be confusing at best. So we're reporting coverage this quarter by looking at 2 time periods, the first 3 months of COVID and also at the trailing 12. And we're reporting those 2 periods in 2 different ways: first, by stripping out HHS funds; and second, what we believe is most important and most indicative of the operator's ability to outrun the pandemic. We show coverage, including HHS funds amortized through June of next year. Since as of now, they have until June of next year to use those funds. We're very pleased to report that through the second quarter, overall portfolio EBITDAR lease coverage on a TTM basis, stripping out all HHS funds is 1.94x. Ensign certainly pulls up that average. Without Ensign, that portfolio coverage without HHS funds is still a very strong 1.28xs. And for just Q2, the first quarter and likely, hopefully, the worst quarter of COVID, EBITDAR coverage without HHS funds was 2.09x, and without Ensign, it was 1.30x. Finally, we continue to be grateful and proud of our association with operators who are adapting, managing and, in some cases, improving during these extraordinary circumstances. Like I said last quarter, as we weigh the current challenges along with the support provided to date, we continue to see a path forward for our operators to continue to care for their residents and patients, keep their caregivers fully employed and pay their rent as they fulfill their role as a critical part of the solution to the crisis. With that, I'll pass the call over to Mark to talk about investments. Mark?

Thanks, Dave, and hello, everyone. On the investment front, we got back on the Board in Q3 with a great tuck-in investment with our tenant Eduro Healthcare. The 2-building portfolio located in Helena, Montana had very little exposure to COVID. And thus, the financials did not have a lot of noise which made the valuation pretty straight forward. We paid $16.6 million for the 2 buildings, which moved Eduro up from our seventh to fifth largest tenant, as we added $1.5 million in rent to our master lease with them. Year-to-date, our investment activity has produced $42.5 million in new investments. We continue to see a steady flow of opportunities coming across our desks, although not close to the pre-pandemic volume we experienced back at the beginning of the year, opportunities range from broken and nonstrategic to stable, performing buildings as well as portfolios. We continue to see smaller operators looking to exit the SNF space for good and expect that trend to continue to happen over the next 12 to 24 months. We're cautiously optimistic about some larger opportunities that we believe will be coming to market over the next several quarters and expect 2021 to be a really active year on the acquisition front. In the meantime, we continue to pursue opportunities that we feel we compare with our existing operator bench and also some operators with whom we would love to commence a relationship that are currently in our operator pipeline. Turning to our - Turning the pipe. While our normal deal flow typically sits in the $100 million to $125 million range as a result of our singles and doubles approach to acquisitions. We are happy to report that we currently sit in $150 million to $175 million range for deals that we feel very good about. The pipe consists of a few small portfolios as well as a few singles and doubles composed of both SNFs and senior housing. The acquisitions in the pipe allow us to further strengthen our existing tenant relationships. But as we discussed on the last call, allow us to begin relationships with groups that we believe will enhance our ability to continue to grow our portfolio, both in our existing footprint as well as in new markets. Please remember that when we quote our pipe, we only quote deals 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 the relatively near term. And now I'll turn it over to Bill to discuss the financials.

Thanks, Mark. For the quarter, normalized FFO was $32.5 million or $0.34 per share and normalized FAD was $33.9 million or $0.36 per share. At quarter end, our payout ratio remains at or among the lowest of our peers at approximately 74% on normalized FFO and 69% on normalized FAD. Leverage was at an all-time low on a net debt to normalized EBITDA ratio basis of 3.1x and net debt to enterprise value was 22%. During the first quarter, we put in place a new $500 million ATM and $150 million stock buyback plan, neither have been utilized to date. Our liquidity remains extremely strong with more than $25 million of cash on hand today. We also have $600 million of availability under our revolver, and we produced almost $9 million of cash per quarter, even after this year's increase in our dividend. Further, with our recent sale of our remaining independent living facility that we owned and operate in, our net debt-to-EBITDA drops below 3x. Cash collections for contractual cash rent in October were 98.7%, and we expect to end November collections at around 98% as well. Moving on to guidance. Despite the pandemic, we are revising upward our previously issued guidance for 2020, which called for normalized FFO per share of $1.32 to $1.34 and normalized FAD per share of $1.38 to $1.40 based on 95.6 million shares. We now project normalized FFO per share of $1.36 to $1.37 and normalized FAD per share of $1.42 to $1.43 based on 95.4 million shares. With only a couple of months to go in the year, let me update you on some of the assumptions that were used in our upwardly raised guidance. Rental income is projected at approximately $170 million for the year, which only includes $80,000 of straight-line rent. Interest income is projected to be $2.3 million. Interest expense is projected to be approximately $24 million and assumes a LIBOR rate of 30 bps. Interest expense also includes roughly $2 million of amortization of deferred financing fees. G&A is projected to be between $15.5 million and $16 million and includes roughly $3.7 million of amortization of stock comp. Guidance for 2021 will be provided in our year-end press release. And with that, I will turn it back to Greg.

Thanks, Bill. We hope this discussion has been helpful to you. We thank you again for your continued interest in supporting of CareTrust. And with that, we'll be happy to answer questions. Kevin, can you instruct them on questions?

[Operator Instructions]. Our first question comes from Jordan Sadler with KeyBanc Capital Markets.

So first question just really on the pipeline. It seems that there may have been some developments overnight because it seems like the pipeline may have picked up even relative to the press release last night from $125 million to $150 million to $150 million to $175 million, I thought I heard Mark. So I'm interested in hearing sort of what the pipeline is comprised of in mostly SNFs and what pricing are looking like? And then I'm also interested to hear a little bit more about some of the larger opportunities you mentioned that could come to market. And maybe if you could kind of give us some guideposts for what larger means?

Yes, Jordan, it's Mark. So I'd say the existing pipe is made up of mostly SNFs. We're looking at some campus opportunities that do have a senior housing component, but no stand-alone seniors housing at this time. To your question on kind of future opportunities. Just in discussions with or the investment kind of adviser community over the last couple of weeks, we know that, that the larger deals are going to come to market. I would say somewhere in the - anywhere between $50 million and $150 million. And those are, obviously, auction processes and good quality assets is what we're hearing is the composition of the portfolio. So we're interested to see what those look like as we've seen much in 2020, a lot of the larger deals have been, call it, nonstrategic. There was a couple that were announced earlier this week. And so we're cautiously optimistic about what is coming. I think as COVID is sort of played out, opportunities have kind of come and gone. And portfolios have been sort of held until people feel like there may be light at the end of the tunnel. And I think in a few particular cases, portfolios that we expect to see over the next quarter or 2 are - have been held until people can kind of get their arms around the financials, and hopefully, we'll be able to underwrite a non-COVID EBITDAR run rate, assuming that something gets figured out early to mid-next year.

So just expanding on that a little bit. Obviously, there's been some deterioration in census, broadly speaking, across the SNFs. And so when you're underwriting one, I assume you're looking at opportunities that include market level deterioration. I'm just wondering how you think about that and sort of redoing that lost census and then when your underwriting. Then I have just - and then kind of a follow-up, it would just be, how is this affecting coverage underwriting?

So to the first question, I think it's obviously important to kind of look at pre-COVID numbers, certainly understand what the level of skilling in place because you can ever drop in census. You can have a spike in humic or skilled mix. But is the spike solely based on skilling in place or is there an actual uptick in more skilled patients coming in? It's probably going to be a combination of both with probably a heavy slant towards skilling in place. So how we address that in the underwriting as you try to structure it in the documents to make sure that there's a safety net, and that we account for the downside risk in other ways. So we're not necessarily solving all the problems just on our underwriting. I think the other piece of it is making sure that from a transactional perspective that we've covered ourselves from anything that could take place going forward, just depending on how long the pandemic plays out. From an underwriting perspective, really every deal is a little bit different. As you know, as we've sort of harped on this for 5 to 6 years now. Every deal is different and a lot of the opportunities that we see on the underwriting side really have a lot to do with the operator that's exiting. And so in each case, it's - as we have opportunities in our pipeline. A lot of - the first assessment is certainly what the portfolio is performing at today, but also where there can be someday one changes in terms of cost structure, in terms of insurance, in terms of maybe on the revenue side of capturing rate. So what we have historically discussed as low-hanging fruit. So the underwriting really is kind of a fluid process in terms of looking at what are the in-place economics of the buildings or the portfolios, but also where is the low hanging fruit with the operator of that is exiting.

Our next question comes from Michael Carroll with RBC.

Mark, I want to kind of continue that line of questioning a little bit. And I think that you've said earlier that there are some smaller operators that are looking to exit the business. And now CareTrust has been able to buy properties and retenant them. Is that something that you're still actively looking to do right now in today environment? Or is it more of the bread and butter sale-leaseback type transactions, just given the uncertainty?

I would say, no, we are continuing to look for opportunities that folks are exiting the business, and we can bring our existing operators into new acquisitions. I think there continue to be opportunities, kind of once you strip out the HHS funding operators still feel very good about being able to come in and take over. If you look at the transaction we did. In the quarter, it was an operator who wanted to exit our operator at Duro, felt very good about coming in and taking over and being able to kind of reach another level from a performance perspective despite COVID. So what - that continues to be our bread and butter, and we'll continue to look to tackle on acquisition opportunities with our existing tenant base.

Now does those deals take longer today, just given the uncertainty and probably the difficulty to transition operations, just given that we're in the pandemic or is it - I mean, it does kind of - just have to be more careful about it that it's still possible?

Mike, it's Greg. I think your questions and Jordan's both acknowledge that the truth that underwriting under the current conditions has become quite a bit more complicated. Why it's difficult to give you a simple answer. Every deal is so different, as Mark says, to begin with. And then you've got this temporary condition, hopefully, temporary condition which you really don't quite know how or when it's going to shake out and sort of normalize. So we're trying to take those things into account and getting very granular with our analysis of these target acquisitions, just as we've done with the lease coverage numbers that we gave you on our existing portfolio today. Just trying to understand what's really going on behind the scenes. And I think if there's ever been a time when our background operators has been a benefit to us. It's never been more so than right now. So we continue to look at those deals. We're committed to continuing to grow. We have great operators in the wings that we would like to bring in and great operators in the portfolio that we would like to expand, and we're not really - while it's more difficult, we're not really going to let the pandemic slow us down. You asked about whether transitions take more time. Actually, transfers of operations are not more complex. Some of the documents around them take a little more time to do under the current conditions. But it's really just the underwriting and evaluating and creating the safety nets in our transactional structures that Mark talked about, which can take a variety of forms that we're not - don't necessarily want to talk about here. But all of that getting to the deal is much more laborious now than it's ever been. But actually doing the deal once that's set is fairly straightforward. When we say that things are pretty calm out there and that the operator community seems to be ready to handle a third wave that they're much better - it's true. It is really are in a much different environment today than we were 6 months ago. Things feel - I mean, there's new things happening every day in the facilities but they're used to them. And it's now standard operating procedures, all this infection control and limited access and everything else. So it's really not complicated in that respect, but it is sort of tough to get to the right numbers and get them over the finish line. Hope that helps.

No, it does. And then just one last question. What is the competitive landscape right now? I mean, is there a lot of capital on the sidelines waiting to kind of get into this space? Are you competing against the same players that you were previously? or has it just been so quiet that there's not a lot of people being active?

Yes. No, I would say it's similar to what we've experienced over the last 12 to 24 months, private, well capitalized buyers who are sophisticated with respect to their understanding of the SNF business. So maybe we're starting to maybe see some of the - of our REIT peers. We are hearing about that are sort of off the sidelines and back and engage. So yes, I would say there's a substantial amount of capital looking for opportunities to find out.

Our next question comes from Jonathan Hughes with Raymond James.

Thanks for the prepared remarks and disclosure. Dave, I was hoping you could talk about what happens to Trillium's EBITDAR coverage? That one kind of stuck out to on the drop in the second quarter.

Jonathan, thanks. Yes. So Trillion goes up to the top 10 because of a rent increase that they had, taking Trio's place. And the first quarter of the COVID experience really took its toll on Trillium, an increase in labor costs and a decrease in revenue resulted in the numbers that you can see there. The good news is, if there is any, and there is, is that Q3 is better than Q2, still not quite up to the 1x coverage without HHS funds but a lot closer. And we feel like they are making the changes that they need to, to their business to manage through this. Trillium is a great example, actually, of just how important these HHS funds are and that disclosure that we show amortizing their relief funds through June of next year kind of showed that. And again, that amortization schedule does not include any future expected additions to the relief funds that we think are coming from the government.

Okay. No, it's very helpful. And that disclosure is really useful. So thanks for putting that together. Jordan already covered my question on the pipeline, so just 1 more for me. I mean if I know that the pipe is a little bigger than even last night, and you guys are optimistic. But - and if we roll into January, February, and we don't see some money moving out the door in terms of investments, could we expect a larger dividend raise than in prior years to share some of the cash flow with investors? It's been raised 9% annually for the past 5 years, which is very strong. But I mean, could it be even higher if the investment pace kind of remains a little muddied as we turn the calendar?

Jonathan, it's Greg. I - We really haven't talked about that. There's probably not a lot that I should say and projecting what dividend is going to be like last year. I will say that historically, we've been very committed to making sure that, that multiyear dividend graph keeps ascending at a solid rate. But we've also been very committed to maintaining a payout ratio that puts funds back into the company when possible, because that's our cheapest form of capital and some of the best return that we believe we can give to our shareholders. And so I don't know what the dividend is going to look like when time comes to visit that, next February, March. But I will tell you that we remain committed to both of those concepts. And we will work through it as we see what the next few months bring. Back to your question about timing with respect to these deals, I think it's important to sort of look at what we're saying in light of the normal cycle for deals that happens every year. We're not accustomed in this space to seeing a lot of deals coming to market in November and December. Usually, they've come by September and October when we're hitting the NIC conferences. And then everybody kind of goes silent until January when people get back after the holidays. So while we do have hope for closing some additional deals this year, and we also have some stuff in the pipeline for next year. I'm not sure exactly what the timing on any of those would be, and we just ask you to hang in and watch the tape, and we'll keep putting points on the Board as there are good points to be had.

Our next question comes from Steven Valiquette with Barclays.

So also just sticking with the lease coverage ratios on Page 6. Yes, basically at the top 10 tenants. If you look at Column 3, which excludes the relief funds, credit at the column 1. And it is interesting that 7 of the companies are up on their coverage ratio in only three year down. Would have thought maybe across the industry, you might have that ratio or that percentage reverse the other way. So I guess I'm just curious, what do you think are the common operating characteristics of the 7 operators that were able to drive better rent coverage in that June quarter. I would have thought it would be the period we would have the biggest falloff in post-acute patient volume being referred in from the acute care setting, et cetera. I was curious to get more color on what drove some of those positive trends?

This is Dave. Yes, that's a great question. And the answer really lies primarily in having - a couple of things. One, you have - what we have in our top 10 is not what you would consider an index of the senior - of the skilled nursing space. We really do pride ourselves in partnering with best-of-breed operators. And this business, pre pandemic during pandemic, post pandemic, is incredibly leadership sensitive and management sensitive. You have the same exact brick-and-mortar but you change out the operator, and you have very different results even with the same exact employees and patients and residents. And so management matters massively. And I think that's what you see in these numbers and then when you look at the commonalities, as you're asking about, the ability to skill in place is a huge factor. Because not only do you pick up skilled patients that are higher-margin patients. But you also have the ability to market yourself as a solution to the problem, to the communities. So in many of our operators, they not only are dealing with the pandemic, but they're positioning themselves to become the operator of choice for not just the hospitals, but assisted livings in the area that have to find a solution to taking care of these COVID residents. So as you have that ability to skill in place, to effectively take care of these patients, that is what's largely translating into these numbers.

Okay. That's helpful. And just to confirm too, is Premier the only company in that list that's predominantly senior housing focused?

Premier seniors housing as is the Pennant group. #6, I'll remind you that Pennant was part of the Ensign group until they spun off about a year ago, and that is primarily a seniors housing operation for us. They also do home health and hospice services besides that.

Yes. Yes, they're probably so we can track that one. So yes. Okay. Okay. I think that covers it. Maybe just to do a quick follow-up. I'm not sure you'll take the bait on this one or not. But if you had to guess, just directionally for next quarter, when these ratios are all shown, would it be directionally improving or maybe staying about the same or maybe falling off slightly? If you just had to give at least a directional view of how things might trend when everyone's reporting these ratios for the third quarter?

Well, I think what you'll see is a bit of a mix. And I say that because in some cases, and I think what we'll probably do is continue to show the time period of the pandemic versus a trailing 12 number. And as you look at just the pandemic numbers versus the first part. The first 3 months of the pandemic you'll see that some folks who were hit hard at the outset will likely be able to show some improvement as they've been able to make some adjustments to how they manage it. And in other cases, you might find that in that first quarter, some of these operators who were able to benefit from skilling in place were able to do that without really being hit too hard by the pandemic. As you know, it was in Q3 that the second wave really hit the western states, where a lot of our facilities are. And so that, as we know, can be a blessing and a curse on the financial side of things, depending on how they manage it. So I'm not going to be able to take the bait completely and tell you that it's going to go up or down for - as a whole. But I think you will see some mixed results there, but I think you might be surprised with some people continuing to do well through all 6 months.

Our next question comes from Daniel Bernstein with Capital One.

I just echo, I appreciate the disclosures on the before and after HHS funding on the coverages, that was very helpful. The 1 question I have is CMS have been recently putting out some toolkits for home health and really an effort to maybe decrease institutional - piece of institutional facilities for skilled nursing. And I mean, very much in its infancy, right? And then also, you look at home health - public home health providers, they're piloting some skilled nursing and home. Do you see skilled nursing at home as a threat to the skilled nursing industry and maybe related a threat to assisted living occupancy as well?

Dan, it's Greg. I'll weigh in and I'll let the guy jump in as well if I miss something. But this is a conversation that's actually not new. It's kind of intensified since pandemic began. And there's a lot of opinions floating around out there about whether or not some percentage of the traditional skilled nursing population is going to move to home health and as well as some comments by Seema Verma recently that I read the question whether some of the traditional long-stay Medicaid patients in the nursing facilities might be better served in assisted living. Our position has always been that those individuals who really could go someplace besides skilled nursing have always gone there. And while there may be some extraordinary things going on right now with some stretching by home health and assisted living to hang on to residents or to attract residents and some extraordinary things going on with respect to the fears of being in a skilled nursing facility. We believe those are subsiding already and that there's going to be a nice snap back to some semblance of normal. Will some move? Maybe. The patient population has been shifting around the healthcare continuum for a long, long time. People that were in nursing homes years ago are in assisted living a lot longer now, that's a demonstrated fact. And so we expect that dynamic to continue, but we also expect the hospitals to continue push to get their census back up. It's going to be a lot of pent-up demand for some of those elective surgeries. And we expect that the hospitals will continue to push patients out quicker and sicker and skilled nursing is the only destination for the vast majority of those. I don't know, Dave, Mark, anything else to add?

That's good.

I couldn't take better myself for there. I guess related to that, it sounds like you think the discharge patterns will probably return to normal at some point in the skilled nursing space. I think that's been the other debate is whether there's been a permanent change in those skilled nursing patterns, but - discharge patterns, but it sounds like you think that may some resemblance of normality will return when elective surgery come all the way back? Is that right? Or is it a little bit too early to make that judgment?

Well, we think it's certainly too early to call time of death on skilled nursing, returning back to normal. Our thesis is that once we've turned the corner, once the country reopens and life gets back to normal, that we return basically to the pre-COVID conditions as we had it before, both in the operating environment, labor environment and the discharge environment from the hospitals.

Okay. One more for me, which is some of your peers have been doing preferred and [indiscernible] funding and loans out there rather than bringing assets right on the balance sheet right away. As part of your pipeline, are you looking at mezz preferred kind of lending deals rather than just straight acquisitions?

Dan, it's Greg. We actually have looked at some mezz and preferred recently. We don't - we are not counting any of that in our pipeline at this very moment. But we're open to it and preferred in the past, and we actually have, I think, a pretty good prospect on the horizon. We'll see how long it takes to come to fruition for some more preferred development that we're excited about. And in terms of the mezz, never done it before, haven't really viewed mortgage lending is our thing. But certainly not adverse to it if the deal is right and the collateral is good.

Our next question comes from [indiscernible] with BMO Capital Markets.

Just a follow-up question from Megan was asking. So is the bigger picture that the elected procedures haven't come back for your particular customer segment? And despite the fact that the hospitals are saying overall, the elective procedure volumes are coming back, but maybe just not for your target segment? Or does it be the second choice that you're just losing share, at least temporarily to other options may be included [indiscernible]? I'm just trying to understand the drivers of census?

Yes. So the discussion of elective procedures is there's a little bit of nuance there, Juan, because the vast majority of the patients that come - skilled patients that come to a skilled nursing facility started their journey through the emergency department. Not really through conveniently scheduled elective surgery. There certainly are those. But over the last 10, 15 years, those numbers have shrunk quite a bit. As hips and knees and kind of the easy patients have largely shifted to being discharged straight home with home health and things like that. So the patients that are arriving and skilled nursing facilities are sicker than ever before. And this is certainly true pre pandemic. And so occupancy, yes, is going to depend somewhat on those elective procedures. But really, it's going to depend more on the country reopening so that people are out living their lives as they were before, which result in far more visits to the emergency department and then ultimately to the skilled nursing facilities.

So you don't think that there's been a loss of share per se then?

No. I don't think we have - we don't have that data to come to that conclusion.

Okay. And then just my last question is just on the balance sheet. I mean you guys are in an enviable position. Is that because you want to protect the downside and don't know how long this is? Or should we think of it at this point given the strength you've seen with the coverage numbers you talked about for the second quarter ex the government, and that you have visibility to in the third quarter that you guys are kind of ready to go on offense and lever up from here? How are you thinking about that big picture?

Juan, it's Bill. I think you can look at it as the trend in leverage has gone down because the acquisition because of COVID, but I would expect, given our stated range of leverage being 4 to 5x that over time, we would probably, depending upon the deal, the yield and the size that over time, we would get to a more - to a higher level of leverage as opposed to where we sit today, which is sub 3.

And I'm not showing any further questions. At this time, I'd like to turn the call back over to our host for any closing remarks.

Thanks, Kevin, and thank you, everybody, for being on the call today. As always, if you have any has additional questions, you know where to find us, and we're happy to visit with you any time. Have a great weekend, and stay safe.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.