CareTrust REIT, Inc. (CTRE) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the CareTrust REIT Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions]. I would now like hand the conference to your host, Ms. Lauren Beale, Senior Vice President of Accounting & Controller of CareTrust REIT. Ma'am, you may begin.

Thank you, and welcome to CareTrust REIT's Fourth Quarter and Year-End 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 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 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-K 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. With me on the call this morning are Bill Wagner, Chief Financial Officer; Dave Sedgwick, President and 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, everyone. 2020 turned out to be a very busy year for CareTrust. One might think that with M&A and our asset classes virtually shut down for most of the year, a health care REIT like ours might have had little to do. But thanks to our conservative balance sheet, our top line operators and especially the outstanding team that I'm privileged to work with here, capital never dried up and the few deals that were out there did cross our desks. Anticipating some potential dislocation in the markets as we recover from the pandemic, the team worked harder than ever to find smart ways to deploy the extensive dry powder we've carefully accumulated over the years. And their efforts were rewarded with $105 million in new assets to help our stock price and related cost of capital recover quickly. To be sure, $105 million is a light year for CareTrust, but we're thrilled to be reporting that we actually grew both assets and shareholder value in the face of unprecedented headwinds this last year. When the pandemic broke, we firmly believe that our outstanding operators will find a way to navigate through the challenge. This gave us the confidence to maintain both our dividend and guidance. That confidence proved well placed as CareTrust collected 99.3% of contract rents in 2020 and experienced no rent leakage in connection with the 1 operator change we made during the year. These results and the ongoing performance by our tenants under some of the most difficult circumstances imaginable have proven once again the value of our operator-first investment discipline. Seeing that, I don't want to downplay the importance of government measures, especially those aimed at helping the skilled nursing industry to weather the COVID storm. CARES Act funds for those who needed them and the waiver of the 3-day qualifying stay have both been huge. To help you see that as clearly as possible, we've once again provided enhanced disclosure around the relief funds in this quarter's supplemental. We hope that the government will see the obvious value in continuing the waiver beyond 2021, and that any additional relief funding will be sufficient to help those who need it to achieve the soft landing our health care heroes and their employers deserve. So in spite of everything that's going on, CareTrust remains well positioned to continue expanding, reducing our cost of capital and solidifying our spot as a leader in the market. For example, on the credit front, in case you didn't see it this morning, Fitch published a BB+ rating on CareTrust today, one notch below investment-grade with a stable outlook. After lengthy conversations with them, we feel confident that they understand our business fairly well, including some of the key things that make us different and better. This marks another important step in CareTrust's ongoing evolution and growth. Finally, speaking of evolution and growth, maybe the most exciting thing to happen this year, we've made some significant personnel moves that we believe will set us up to take CareTrust to the next level and beyond. First, congratulations go out to Dave, who is named President and Chief Operating Officer by our Board this week. Most of you know Dave well, and you won't be a bit surprised by that move. In his expanded role, Dave will be taking even greater responsibility for leading our investing, financing, asset management, portfolio management and Investor Relations efforts. This will free me up to spend more time on strategy and relationships and will further strengthen an already solid team. Second, a long overdue congratulations goes out to Lauren Beale, who was promoted to Senior Vice President and Controller this week. Lauren has been with us almost since the beginning and has pulled the laboring war on everything from setting up our accounting systems to designing and implementing our internal controls over financial reporting to handling audit and overseeing SEC reporting and more. She's been a huge contributor, and we couldn't be happier to have her on the team. Finally, we feel like we scored a major win in persuading James Callister, one of the best-known and most well-respected attorneys in the health care REIT world to join us as General Counsel and Secretary. James has been with us as outside counsel from the beginning and bringing in-house will allow us to involve him and his deep expertise at higher levels in the day-to-day workings and growth of the company. We're grateful to have him. As is the case with our operator-first investment philosophy, for the team here, it's all about the people, and it is a real privilege for me to work alongside so many amazing and talented professionals who all share the same goal, to make CareTrust the health care REIT of choice for operators, capital suppliers and investors. So with that, I'll turn it over to Dave for some more color on what's happening out there. Mark will jump in with the pipeline, and Bill will finish off the financials. Then, we'll open it up for Q&A.

All right. Thank you. Good morning. Today, I'd like to address 3 interrelated areas of focus for the company. First, I'll briefly address vaccine participation. Second, I'll update you on occupancy. And third, I'll dig into our latest lease coverage disclosure and speak to the question of runway for our key operators. First, regarding vaccines, we have recent data from all but 2 of our operators. And based on those direct reports, as of February 5, resident participation is coming in at 67.6%. For some context there, the CDC reports skilled nursing residents participation ranging widely from nominal to 100% with the median at 77.8%. As for staff participation, we're coming in at 42.6% so far. Again, for context, the CDC reports skilled nursing employees median participation at 37.5%. We've been looking to the vaccine to be an effective catalyst for a return to normal life, which will, in turn, be a catalyst for a return to normal hospital discharge patterns and recovery in SNF occupancy trends. Next, let me report on occupancy. I've noted on past calls a simultaneous decline in overall occupancy in our skilled nursing facilities, coupled with an increase in skilled mix. Fortunately, the revenue loss from the overall census drop is being significantly offset by the increased skilled revenue. In Q4, our operators reported a sequential decline in SNF occupancy of 154 bps. However, comparing Q3 skilled mix to Q4 skilled mix, we saw another increase of 270 bps. I can't underscore enough the importance of the waiver of 3-day qualifying hospital stay as a lifeline for both the patients who are able to avoid a risky and traumatic transfer to the hospital and for the operators themselves. For seniors housing occupancy, the first 2 quarters of COVID showed remarkable resilience. Q3 seniors housing occupancy was at about 82.5%. In Q4, our operators reported occupancy of 80.4%. As with skilled nursing, we have some facilities gaining ground and others who have slipped. Remember, our sample size for seniors housing is relatively small here. Going from 82.5% down to 80.4% is the result of each seniors housing location dropping by only 1.5 residents on average. While occupancy is certainly central to the plot, the elevated expenses and soft costs associated with the pandemic are also very important, which leads me to my third area of focus, lease coverage. You see in yesterday's posted supplemental a continuation of our enhanced COVID-era disclosure, wherein we try to be as transparent and helpful as possible by reporting lease coverage on an EBITDAR and EBITDARM basis, both excluding CARES Act funding and amortizing the CARES Act funds received to date through June of this year. From our perspective, there weren't really any surprises. Stripping out the CARES Act funds, we saw overall portfolio coverage hold steady, just down 2 bps to 2.07x. Look, to be anywhere near 2x coverage without CARES Act funds this deep into the pandemic is remarkable and a testament to the quality operators in the portfolio. On the other hand, there are, of course, some areas in the portfolio that have absolutely needed the HHS funds. We spent a lot of time modeling what we refer to here as runway for those few operators. Making a couple of assumptions around run rate performance and a baseline minimum 1x lease coverage ratio, we are cautiously optimistic about the runway they have to make a soft landing back to pre-pandemic fundamentals. One note on asset management. We welcome Noble Senior Services, an operator we've worked with since 2019, to our top 10 list last quarter. Noble stepped into our existing Virginia Seniors Housing assets under a new triple net lease with no loss in rent. They've done a great job with the assets they transitioned for us in 2019 and both we and they are excited about their prospects in the Virginia portfolio. From our first earnings call since the pandemic started, we maintained guidance because we could see a reasonable path for that guidance to be achieved. We acknowledge the several uncertainties that will likely remain throughout this year. But when we take what we have experienced so far, and weigh the existing headwinds with the regulatory and financial support given to the industry, we continue to see a reasonable path for this year. With that, I'll pass the call over to Mark to talk about investments. Mark?

Thanks, Dave, and hello, everyone. We wrapped up Q4 and the year with 2 investments. First, in November, we closed on the Texas 4 portfolio, which we bought with existing leases in place with The Ensign. The value for us was both the blue-chip operator and a portfolio that covers well above 2x on an EBITDAR basis. We paid $47.6 million for the portfolio and received annual rent of just under $3.8 million. Later in the month, we made a $15 million mezzanine loan at a rate of 12% to Next Healthcare on a portfolio they purchased in the Mid-Atlantic region. This was our first investment alongside Next and we hope to grow our relationship with them over the coming years. We finished the year with a total of $105.3 million in new investments. Deal flow continued to be light in Q4 as COVID spiked, operators continue to keep their heads down, and both underwriting and diligence were complicated by the pandemic. However, we have seen an uptick in deal flow over the past few weeks, and based on conversations we are having with the brokerage community, we anticipate an increase in opportunities over the coming months as operators navigate their way out of the way this COVID spike. Deal flow today is largely composed of one-off, nonstable senior housing assets with smaller portfolio opportunities scattered over several states. On the SNF side, we continue to pick through largely broken and challenged assets to find opportunities that work for our operators. That being said, we expect 2021 to be an active year as we believe more and more small operators will look to exit the business as we get COVID further behind us. But we are watching this closely as another spike in COVID could push out this time line further into the back of the year and into 2022. As we sit here today, the pipe continues to hover in the $125 million to $150 million range, which is in line with our historical range. It is primarily made up of singles and doubles, but there are at least a couple of small portfolios that we hope to pair with both our existing tenants and a couple of new ones that we would love to welcome to our core of best-in-class operators. The composition of the pipe is mixed between SNFs and seniors housing assets. And for each deal, we are carefully pursuing a customized transactional structure designed to help our operators as they face remaining COVID-related uncertainties involved over the initial 12 to 24 months after acquisition. 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 grew by 5% over the prior year quarter to $34.2 million or $0.36 per share, and normalized FAD grew by 5% to $35.7 million or $0.37 per share. Even though we raised our dividend significantly in early 2020 and maintained it despite the pandemic, our payout ratio remains right where we like it at approximately 69% on normalized FFO and 68% on normalized FAD. Leverage continues to be at all-time lows at a net debt-to-normalized EBITDA ratio of 3.3x. Our net debt-to-enterprise value was 20% as of quarter end, and we achieved a fixed charge coverage ratio of 8x in Q4. Last year, we saw no reason to pull guidance as rents continue to come in. In 2021, we plan on taking the same approach As long as rents continue to be collected, we will continue offering our best estimates of where we think the year is headed. So as of right now, we expect normalized FFO per share of $1.40 to $1.42 and normalized FAD per share of $1.49 to $1.51. This guidance includes all investments and dispositions made to date, a share count of 95.6 million shares and also relies on the following assumptions: One, no additional investments or dispositions 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 1.25%. Our total rental revenues for the year, again, including only acquisitions made to date, are projected at approximately $175 million, which includes less than $80,000 of straight-line rent. Three, interest income of approximately $1.8 million. Four, interest expense of approximately $23 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. And five, we are projecting G&A of approximately $17.5 million to $19.4 million. Our G&A projection also includes roughly $7 million of amortization of stock comp. This range is up approximately $1.2 million to $3.1 million over 2020 due to our newly structured long-term performance plan causing us to recognize more in new stock compensation expense in 2021 and roughly $3.2 million more than in 2020. Additionally, and as we recently disclosed, we have brought on a new general counsel who used to work primarily on investments for us in the past while at his outside legal firm. Now that he will be working for us and even though his duties aren't materially changing, the accounting rules require us to expense these costs instead of capitalizing the cost to new investments. So while it's cash neutral to us, it does negatively impact G&A and FFO and FAD per share. Our leverage and liquidity positions remain strong. We did not sell any shares under the $500 million ATM that we put up last year and the outstanding balance on our $600 million revolver currently sits at $50 million, and we have approximately $19 million in cash. In addition, cash collections for January came in at 100% and are currently at 98% for February, but we expect that number to go to 100% shortly. With that, I'll turn it back to Greg.

Thanks, Bill. Again, we hope this discussion has been helpful to you. And we thank you again for your continued interest and support. And with that, we'll be happy to answer questions. Valerie?

[Operator Instructions]. Our first question comes from Jonathan Hughes of Raymond James.

Dave, could you give us some more details and background on the operator transition in the quarter and then maybe also talk about Noble's progress on the 2019 properties they took over?

Yes, I'll go in reverse order. We stepped into a portfolio back in 2019 of 7 facilities across four states. It was the beginning of our relationship with them and they've done a very good job of stabilizing those assets and increasing occupancy there in -- even in a couple of the buildings that had historically been fairly challenging. There -- 1 of those 7 actually has been closed this entire time. And so once -- and is about to come online down in Fort Myers. So once that comes online and they're able to fill that up, their performance in that lease will we do exceptionally well. Because of their performance there, we felt confident in turning to them for these Virginia assets. The operator that exited essentially felt like they would be -- these assets would be in better hands with somebody else in terms of the ability to meet the rent obligations going forward. And so, when Noble took a look at them, they saw a lot of potential as they did with the original 7 and we're excited to step in at the current rent.

Okay. That's helpful. So just to clarify on the Noble coverage that's shown in the sup, does that include 1 property that's effectively -- I mean they're paying rent on, but it's not generating any EBITDAR because it's closed. Is that right?

That's right.

Okay. Maybe 1 for Mark here on the deal pipeline and external growth, but you mentioned you're offering customized structures on some deals. Can you kind of expand on that, what you mean by that?

Yes. I don't think it's -- I think in this age of COVID, I think there are -- I don't think we're the only ones that are doing. I think, really, it's more a function of uncertainty around occupancy and where revenue is and kind of getting the necessary protections and safeguards in place should occupancy or revenue dip prior to our operator taking over. So it's -- I mean, whether that's a form of a holdback or other creative ways to make sure that our operators are not going to be harmed as they take over. As you know, sometimes as you have operators exiting portfolios, they tend to take their foot off the gas. And so we just need to make sure that occupancy levels and overall cash flow levels, there's a catch-up or a look back mechanism to make sure that our operators, from a coverage perspective, are not harmed by that.

Okay. So maybe like after a couple of years if things recover and stabilize, there's a reset feature in there to be able to capture some of that upside that you're giving them leeway on in the near term?

No, it's more of a function of the outgoing operator, the outgoing owner of the assets would -- there's a catch-up feature to the -- directly to our operator just depending on how quickly the recovery takes place with the new incoming operator getting the building or buildings back to, call it, pre-COVID levels.

Okay. Maybe I'll follow-up off-line, but I want to ask 1 more for Bill. I want to leave you out. Can you talk about the stock comp guidance and the new performance and incentive plan? It is a noticeable increase. So any color there on how that package has changed would be helpful.

You know what -- Jonathan, it's Greg. I'll take that one. Quite simply, we've just switched to a more conventional type of long-term incentive plan that is different from what we've been using, since what we've been using was sort of back-end loaded, and we took the expenses later. Now using a more conventional plan, there's issuances upfront that have to be the best over time. And for this year, and I anticipate only this year, we will sort of have a double stock expense, so to speak. But I think it's better overall. I think the shareholder advisory services and others are going to like the plan better, and we'll publish more about it in the upcoming proxy.

Our next question comes from Steven Valiquette of Barclays.

Great. So first question, the trend of the improving EBITDA rent coverage ratios among many of your leading SNF operators during the first 6 or 9 months of the COVID pandemic versus the pre-COVID baseline, it is pretty remarkable. So I guess I'm just curious to hear more about some of the fundamental drivers within the SNF operations that are driving the improving EBITDAR. I'm sure it's a comp of a lot of things, whether it's improved skill mix or just treating higher acuity patients. Also as SNFs are just treating more and more COVID patients, are COVID patients ultimately turning out to be a fairly profitable patients for SNFs either based on reimbursement bonuses or other factors? Just curious to get your thoughts around all this as far as the improving fundamentals within the SNF post COVID.

Thanks for your question, Steve. Yes, it has been a remarkable trend to see and in your question, you sort of answered it by talking about the main drivers. And you're right, it really is the skilled mix that has offset the drop in overall occupancy significantly. A couple of other things, just a little bit more color on that. We saw PDPM kick in just in time for this pandemic. I think the picture that we'd be seeing here would be different if we were still on the old RUGs program that was largely driven by volume of therapy minutes. But the fact that reimbursement is now based on the clinical characteristics of these patients, and -- has mattered a lot. We see or -- our Medicare rate go up quite a bit because of PDPM. And then it goes up -- after COVID starts, we see that tick up just a touch more because the COVID patients does require a lot more in terms of cost. And those characteristics of a COVID patient are captured under PDPM. When captured appropriately under PDPM, those costs are reflected in the reimbursement. So right now, we have a lot of our operators, well, not just now, but from the get-go, some of our operators realized that they needed to be part of the solution. And so they created wings in their facilities that would specialize in COVID and became sort of that COVID facility of choice in their markets, and that trend has continued and is largely the reason for the increased performance there.

Okay. Great. That's definitely helpful. One other quick question, it's like I probably could have tracked down the answer to this, but sometimes it's hard to keen track of all the individual transactions taking place among some of your operators. But it looked like Ensign maybe acquired some additional properties in the fourth quarter over and above the four Texas facilities that CTRE also press released. I wasn't sure if there is just some variables that determine when CTRE is involved in facilities being acquired by your largest operator when you're not, or maybe there's some other nuances there. I think they acquired some California properties, but maybe they were just circumstances there. I just want to hear more about some of the -- when you're involved and when you're not with that particular operator.

Yes. This is Mark. My understanding is those were a transition of another California operator and there was another landlord involved. So it was just -- it was the transfer of the operations for those 3 California-based assets that you touched on.

And just to be clear -- this is Greg. This is -- the assets that we took over in November that were Ensign assets, those we just bought from another landlord with Ensign leases already in place. They've been in place for some time. And with respect to any additional work that we do with them, we show them deals from time to time, and we'd be happy to have more -- to grow our relationship with them any time and every time it makes sense to do so.

Our next question comes from Jordan Sadler of KeyBanc Capital Markets.

Curious about the CPI escalator assumption. Bill, I think you threw 1 quarter into the number. What is the impact of every 100 basis points of CPI on FFO? Is that an obtuse question, something you might have handy?

Let's see. Well, it's going to impact 2021 a little differently because some of our leases, the renewal dates are throughout the year. Our biggest renewal...

Yes, that's why I asked.

The biggest renewal, which is Ensign, hits on June 1. And let's see, that would be if we -- it's about $0.01 for the year on those CPI increases. So I would say it's not...

It's 1.25% for just -- for every 100 basis points or just the 1.25% you've guided?

For the 1.25%.

Okay. Okay. And then there's some incremental contribution across the rest of the portfolio?

Correct. That $0.01 for 2021 is 1.25% on all leases.

Okay. The $0.01 is 1.25% on all leases. That's all the impact is. Okay.

Yes.

And in terms of the sort of acquisition pipeline, Mark, you talked a little bit about it. I'm curious, the appetite on seniors housing. I mean you did say the pipe includes the mix, the corporates and seniors housing. And I'm kind of just curious how you're thinking about sort of pricing, coverage, the occupancy required as you underwrite those types of assets today?

Yes. So I think the first variable is going to be which of our kind of small, stable of seniors housing operators are looking to grow at this point. We're also kind of keenly focused on the outgoing operator and kind of how strategic the asset or assets are to them, how much low-hanging fruit on the expense side is there for our operators to kind of come in and make some day 1 changes. Certainly, on the occupancy side, that's going to be a bit of a mixed bag. Obviously, depending on the area, some occupancies have held up better than others. So I think from an underwriting perspective, we always -- we're kind of always in that 1.2 to 1.25 on an EBITDAR basis. But really, it's kind of like, as we kind of view SNF opportunities, where is the low-hanging fruit, and maybe occupancy has been held down because the existing operator just didn't want to admit, didn't really have the right infection control protocols in place. So yes, I mean there is some seniors housing in our pipe. And we feel comfortable with where the buildings kind of have performed over time, and we think that our operators are going to get in and actually kind of increase occupancy fairly quickly. And -- so really, it's kind of on an asset-by-asset basis.

Mostly, you'd be -- these would not be sale-leasebacks, it sounds like. It would be new operators?

That's right.

Okay. And the coverage, you're talking about the 1 to 1.25, that's going in where upon stabilization?

I would say when you underwrite any deal, you can sort of sign the PSA and have coverage at 1.2 or 1.15 or 1.30 and that number will inevitably move around. I think we would expect the coverage upon stabilization to kind of be above 1.25. Where we ultimately end up going in is going to be a function of when we close on the transaction. So I would expect it to probably be anywhere coming in, in the 1.10 to 1.25 range, just really kind of dependent upon how COVID impacts specific facilities and where we are when we actually close on the portfolios relative to how the operators are doing. But that was part of the prepared remarks in terms of where we're structuring so that the operators, if we sign a deal up at 1.25, our structure will allow us to -- will allow our operators to kind of catch up or get -- made a whole to an extent on some of the cash flow that they maybe have had to have put out. So we feel very comfortable about in the particular assets that we currently have in the portfolio of how we've structured for coverage and giving that runway to get to where they need to be on a stabilized basis.

Right. And then lastly, maybe for Dave. Congrats, Dave, on the promotion. But I thought a little color maybe on some of the tenants who seem to be under the most pressure in the portfolio. We already discussed really Noble from a coverage standpoint, but maybe back on Premier, Trillium fell off the top tenant list. So any insight you can cover. I know some of these guys have not received HHS provider relief fund?

Yes. Regarding the seniors housing guys like Premier and Noble, you're right, the HHS funds have been anemic, if any. And so they've been kind of fighting the headwinds without that support and doing an actually pretty strong job compared to the rest of the seniors housing sector. In terms of an update, there's really not much of an update to give over the last couple of quarters. It's just more of the same in terms of their navigating the challenges that COVID presents. It's difficult, as you can imagine, to be in a situation before COVID that was challenging and trying to make that turn and then to continue to try to make that turn during COVID. Trillium on the skilled nursing side has, like many of our other operators have had, a bit of a roller coaster with COVID. They've had some pretty hard hits on the occupancy front and the expenses, expenses for skilled nursing have increased quite a bit. I think our OpEx, PPD has gone up by 9% because of COVID. That's largely because of staffing costs, agents needing agency costs as people have to be quarantine for COVID and things like that. So while it's been a pretty steady quarter for us, we don't want to convey that all is nice and easy out there. Our operators are definitely still slaying dragons in their several markets.

Is there anybody that we're like worried about here who is not current on rent or is at risk?

No. Like Bill said, we expect to be at 100% rent for this month, like last month. And yes, there's -- in spite of the dragons that they're slaying, they really do have a lot of runway. And so for the foreseeable future, we feel like the liquidity is there to help them bridge the gap.

[Operator Instructions]. Our next question comes from Jason Idoine of RBC Capital Markets.

I wanted to ask a question on maybe what you're hearing from your operators or what your own expectations are for, I guess, what the remaining duration of the emergency health period would be or what you would expect it to be? And when should we be start thinking about the HHS supports beginning to phase out?

Well, we've got some good news on the government funding. As you know, the emergency has been extended through the end of this year, which means that sequestration and FMAP and the 3-day qualifying stay, all very important supports for the industry are -- should stay in place now through the end of this year. There's still somewhere around $27 billion of -- from previously passed stimulus money that has not been allocated yet. And so, it's too early to sort of predict the degree of the recovery slope and when that really starts. We think that overall, it's going to be fairly uneven throughout our portfolio and throughout the country as a whole. We're encouraged to hear anecdotally some -- from our operators that where they are seeing COVID wane that they're starting to see an increase in their overall skilled nursing census. But that's the color that we have right now on the government funding as it relates to -- and as that relates to our recovery.

Got it. Okay. And then the balance sheet today is pretty well positioned. I know you guys have some room for additional leverage, also the ATM available. So I guess, how should we think about the targeted range of 4 to 5x and where you guys sit today? And maybe how you'll be funding acquisitions in the future?

I think you'll see us continue to -- as long as stock price kind of stays where it's at, we like to match fund the deals as we go. If large deals come up, we would love to maybe do it overnight or the high-yield market is wide open with very, very attractive pricing, we could tap that as well. But I would expect over time even though we love the leverage where it's at right now, it is a tad bit low. So slight -- call it, a slight uptick in it.

Got it. And then last 1 for me. I know the investment volumes have been pretty light through the pandemic, but are you seeing any larger portfolio start to come to the market? Obviously, you completed the four property acquisition this quarter. But are they still mostly onesie-twosies coming to the market or anything bigger?

Yes. No, everything is kind of onesie-twosie. Obviously, there's been some announcements from our REIT brethren of some $500 million plus deals. There's a couple of large SNF portfolios that closed last year down in the southeast. So at this point, to our knowledge, there isn't really anything that's kind of that magnitude at this point in time. But we are tracking a couple larger portfolios that we know the operators want to exit at some point. But they obviously want to make sure that their numbers are kind of back to pre-COVID levels so that they can meet the valuations that they want. But as we sit here today, there isn't anything that is chunky or significantly transformative.

Our next question comes from Daniel Bernstein of Capital One.

Congratulations, Dave. I guess when we were talking to your peer, Omega, on their earnings call, there's a debate as to how fast skilled nursing occupancy can come back and whether kind of home health has permanently taken some market share from the skilled nursing business. So I just wanted to kind of get your thoughts on how much has home health impacted your portfolio? And maybe whether there is a permanent change in discharge pattern as a result?

Dan, this is Dave. Yes, home health has historically been a very close second to skilled nursing for Medicare post-acute discharges. And given the circumstances of COVID, I don't think anybody is surprised that home health has bounced back faster than skilled nursing. But I'd say that the narrative around home health permanently taking share from patients from skilled nursing is mistaken. Now given the impending demographic surge, it wouldn't be a bad thing if they were able to take more share over time because as you project, 5, 10, 15 years, we're going to have a capacity problem. But before, during and after the pandemic, essentially all residents and patients in skilled nursing facilities need to be there. And structurally, home health has the same ceiling on how high it can climb the acuity scale as they did before. And just some home health context there. On average, over a 60-day period, a home health patient will be visited by a nurse 8x. They'll get on average 18 visits from the home health agency, a mix of nurses and therapists and others, but that nurse is going to visit, on average, 8x over 60 days. In a skilled nursing setting, a Medicare patient must be seen by a nurse multiple times every day. It's just a very different type of patient. And those patients, well before the pandemic, have already largely been going home if at all they had that ability to do it. So we believe that with time, the balance of discharges to skilled nursing and home health will recalibrate.

Okay. Okay. I appreciate the answer. And I experienced exactly what you said first-hand with the parent coming home and seeing a nurse twice a week for a couple of weeks, and that was it.

One other thing on that, Dan, I was talking -- we talked recently with -- just a little anecdote, spoke with a fairly large regional home health operator in the Midwest. They take care of about 1,400 lives a day. And in the fourth quarter, they told us that they diverted 30% of all their new patients to skilled nursing facilities due to acuity needs. So yes, you might be seeing quite a bit more going to home health out of the hospital. But in this case, 30% of those couldn't stay in home health, they had to go straight to a skilled nursing facility.

Okay. Okay. And then the other question I had was just going back to Ensign. They had split out their real estate as a different, I guess, part of their business. And I didn't know if you had any thoughts on whether there was an opportunity to maybe help them monetize or realize the value of that real estate in some form or fashion. I don't know, kind of open-ended question. But I just thought I was curious that the Ensign had split out the real estate within its financial statements. So I don't know if there was an opportunity there for you.

Dan, it's Greg. That was an interesting move, and we haven't actually had an opportunity to chat with them about that. So we know exactly as much as you do about their thinking behind that. Again, they're a great operator and a great tenant for us. And as I mentioned before, we'd love to do more with them if the opportunity arises.

Our next question comes from Theo Zaferiou of Wells Fargo.

Congrats, Dave, on the promotion.

Thank you.

Most of our questions have been answered, but we wanted to ask some questions around tenant purchase options. It looks like a portfolio of 7 properties are up for tenant purchase options starting here in Q1. Just wondering if you could talk about any conversations you've had on that front. And if they did choose to exercise, how much notice or time the lapse is typically until those transactions are completed?

Yes. At this point, we don't expect them to exercise that option this year. There's -- we have good dialogue going with all of our operators. And I think we would have quarters before a window opens, we're going to start kind of having that conversation with those guys to see how -- what their plans are. So at this point, we don't expect any options to be exercised this year.

Great. That makes sense. And in general, it looks like most of the tenant purchase options we see are for leases expiring in 2030 and beyond. Are these legacy kind of agreements? And have you included tenant purchase options in your more recent deals?

Yes. So look, we're sure to grow, not shrink. However, there have been a handful of times where we provided purchase options in order to sweeten their risk/reward assessment for operators when -- usually when taking over existing operations and allowing us to maintain the rent where it is. But it's not something that we're -- that we do as a matter of course. Occasionally, there will be a new investment that has a particular building or two, that in order for the operator to engage, you'd have to sweeten that deal for them. But most of what you see here is a result of some restructuring work and re-tenanting and giving incoming operators the incentive to step in and take some higher-than-normal risk and taking over some buildings that need some turnaround.

Our next question comes from Omotayo Okusanya of Mizuho.

Dave, congrats. And also a good quarter, good guidance. In regards to government regulation going forward -- can you hear me?

Yes, we can.

Perfect. In regards to government regulation going forward, I appreciate the commentary about FMAP and sequestration being extended to the end of the year. Any comments around what could potentially happen with PDPM reimbursement, come the typical spring period when it's kind of reviewed for the next fiscal year would be helpful. And any comments around Medicare advanced payments and an extension of the payment period would also be helpful if there's anything out there.

Well, Tayo, thank you, by the way, but I'm not sure we have much more than some sophisticated speculation to share on those fronts. With PDPM, when it first came out, I think there was a general expectation that some period after seasoning of a brand-new program that Medicare would reevaluate and potentially recalibrate the algorithm to make sure that the rate is doing what is expected. What we saw in the previous administration was, I think, an indication that any attempt to recalibrate was going to be put on hold until the pandemic was behind us. I think our -- I think most folks in the industry expect that, that position to maintain under the new administration. So -- but again, it really is a guess and nothing better than that, that it's likely not going to be tinkered with this year, but it certainly could next year with the assumption that next year, we're going to be living in a post-COVID world at some stage. So as far as the new Medicare advanced payments...

Advance payments.

Yes. I think we had 1 of our operators who participated in that, but I'll have to double check on that for you. And I don't have any new information about the government's plans on changing the goalpost there except for the fact that they continue to then move the goalpost out further. So I wouldn't be surprised if that were to take place.

Great. That's helpful. And then 1 quick follow-up. Again, a lot of positive commentary on the call about the acquisition outlook. But yet you specifically don't put acquisitions in the 2021 guidance. Any reason why? And again, it seems like there could be potential upside to guidance just from you guys in accretive deals given your low leverage.

Yes, Tayo, this is Greg. We've never put acquisitions into our guidance simply because we think that imposes sort of an artificial discipline on us, that's not real. We would hate to tell you that we're going to do X hundred million dollars of deals this year and then fall short or worse stretch farther than we should to hit that number if the market's not there for us. So we'll let you decide what you think we can do in a year, and we'll just report the deals as they come in.

All right. I'm going to stick to $1 billion in the model.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Greg Stapley for any closing remarks.

Thanks, Valerie, and thank you, everybody, for being on the call today. It's been good to chat with you again. And as always, if you have any other questions or anything else we can help you with, do not hesitate to call. Take care.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.