CareTrust REIT, Inc. (CTRE) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the CareTrust REIT's Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Lauren Beale, SVP and Controller. Please go ahead.

Thank you, and welcome to CareTrust REIT's second quarter 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, 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. Yesterday, 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 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. Greg?

Thanks, Lauren, and good morning, everyone. In Q2, we continue to methodically execute on our long-term business plan, in spite of the near-term challenges posed by the pandemic. We acquired some great facilities, refinanced some higher-cost debt, raised a little equity, saw our SNF census start to rebound, collected all of our contract rent and continued to refill our pipeline. But before we go into all of that, we note that as the current wave of Delta variant infections raises the possibility of more limitations on the activities of daily living, skilled nursing and seniors' housing industries continue to battle back from the downdraft in census that bottomed them in the first quarter of this year. Not surprisingly, skilled nursing and seniors housing facilities, which were a favorite target of the finger pointers in the early days of the pandemic, have today become some of the safest and healthiest places for vulnerable seniors and post-acute patients to be. We're proud to be associated with the people who provide these services, and we continue to base our business strategy on a commitment to move as many facilities as we can into the strongest operating hands possible. While our providers have risen to the challenge of protecting residents, patients and staff from this highly infectious disease, they are still dealing with the lingering effects of the pandemic, most notably depressed census, increased labor costs and a shortage of qualified workers. Our robust disclosure around lease coverage, which we began last fall, has clearly demonstrated the importance of provider relief funds for the skilled nursing industry. Our skilled nursing providers have fared well as the government has provided significant funding and other measures designed to fill the gaps created by decreased occupancy revenue and increased operating costs. We're hopeful that the industry will soon receive some or all of the remaining provider relief funds, which many operators still need. Our quarterly lease coverage disclosures have also highlighted the looming dangers of failing to provide direct financial support to seniors housing. Census for AL providers is unlikely to recover as quickly as it will for skilled nursing. These providers, especially those serving mid-market and lower income clienteles, provide a highly valuable and essential service to society, and there are good reasons for payors to want to keep those residents healthy and in place for as long as possible. We joined with many voices who are calling on government to acknowledge the critical role that assisted living providers play in the healthcare continuum with direct relief funding. That said, we're very pleased with where we are today. This quarter, we posted double digit normalized FFO per share growth of 10.2% over the same quarter last year, and increased our dividend by 6% at the same time. We collected 100% of contract rents in Q2 and 96.2% thus far for July, and we believe that we can yet collect a 100% of rents due this year. We grew the portfolio with $42.3 million in new investments, since the last quarter, bringing our total capital deployment for the year to almost $185 million so far. We reduced our borrowing cost with the $400 million seven-year bond issue we completed in June of the 3.875% coupon to refinance our previous 5.25% bonds. This fixed and reduced that chunk of our long-term interest expense and pushed those maturities out to 2028. We held steady on leverage, with net debt-to-EBITDA of 3.7 times and debt-to-EV of 22.1% at quarter-end. We used our ATM to sell 288,000 shares in the quarter at an average of over $24 per share. And with all of that, we increased our FFO and FAD guidance yesterday, reflecting our constructive view of our own future and the future of the post-acute care and seniors housing industries, notwithstanding the near-term headwinds we are all facing. Other than that, it was a pretty boring quarter. And so to wrap up, despite the short-term challenges with great operator relationships, plenty of liquidity and a great team here, CareTrust remains well positioned to continue pursuing our mission of pairing great operators, with meaningful opportunities to transform individual facilities, and by extension the industry as a whole for the better. With that, I'll turn it over to Dave to discuss the industry and our portfolio, then Mark will jump in with recent acquisitions in the pipeline, and Bill will finish off with the financials. Then, we'll open up for Q&A. Dave?

Thanks, Greg, and good morning, everybody. In Q2, our skilled nursing operators reported continued occupancy recovery. Looking at the facility level data through May, 18% of our SNFs and campuses are at or above 100% of their pre-COVID occupancy, and are moving in the right direction. For the SNF portfolio overall, occupancy has grown from January 4 of about 67% to around 70% in June, for a rate of recovery of about 60 bps per month. If that rate held constant, we would be looking at approximately next April to May to return to our pre-pandemic occupancy levels of 77.7%. But we expect it to fluctuate a bit, due to a few factors like the Delta waves concerns, which we hope will be short-lived, seasonality, Q3 usually being the softest quarter for skilled nursing census for example, and a reported inability in some market to admit patients due to staff shortages, which we think may be beginning to resolve. On the skilled mix front, at quarter-end, our operators were still roughly a150 bps above the pre-pandemic skilled mix norm, which continues to help offset some of the revenue loss, while occupancy recovers. Seniors housing occupancy is a somewhat different story. Before COVID, average occupancy in our portfolio was 84.5%. We appeared to hit a low point in March of 73.5%, and that level has held steady through June. While we expect seniors housing occupancy to recover and actually exceed pre-pandemic numbers at some point, as Greg mentioned, it will not happen nearly as quickly for assisted living as it is happening for skilled. As a reminder, seniors housing only accounts for about 17% of our portfolio. Next, let me talk about our lease coverage. In yesterday's supplemental, we continued our enhanced COVID-era disclosure, wherein we tried to be as transparent and helpful as possible by reporting lease coverage on an EBITDAR and EBITDARM basis, both excluding CARES Act funding and including and amortizing the CARES Act funds received today. Since last quarter's supplemental, HHS updated the utilization and reporting guidelines for the CARES Act, so this supplemental's amortization methodology follows the updated guidance and provides a pretty reassuring picture for most, if not all, of our skilled nursing tenants. Looking at the COVID-era numbers. Overall portfolio EBITDAR coverage, excluding CARES Act funds, was essentially flat from the immediately preceding quarter, ticking down slightly from 2.12 times for the nine months ending on 12/31/2020 to 2.07 times for the 12 months ending 03/31/2021. However, both of these numbers are considerably higher than the same pre-pandemic number which was 1.92 times for the 12 months ending on 03/31/2020. The relative strength comes from several of our skilled nursing operators including Ensign, which has done an amazing job throughout. Predictably, if you've been watching our coverage disclosures, our seniors housing operators are facing strong headwinds right now. Our current assisted living operators were improving operations and coverage, leading up to the pandemic, and they all largely held their own through 2020. But January's sharp decrease in occupancy, coupled with elevated labor costs, had made a challenging operating environment that much harder. I'd like to point out on the Top 10 coverage slide, that Noble's coverage is not apples-to-apples with last quarters supplemental. We've removed two facilities from their coverage calculation as we are pursuing a sale of one, and the other has been undergoing a major remodel and has not been open for operating. Noble did not pay July rent, and has requested a short-term deferral for July, August and part of September, backed by a plan to have all deferred rent paid before the end of the year. As we sit here today, we have not agreed to the deferral request, but are having positive discussions with them about their plan and path forward. All of our assisted living tenants have been very communicative and open with us about their situations and their efforts to weather the storm. For Noble, this has made it much easier for us to work with them as they chart a positive path forward, and we have reason to believe that they will continue to improve operationally, barring any major fallout from the current Delta wave. Shifting from our portfolio to the broader picture, we have a positive update regarding the remaining provider relief funds. First, we enjoyed a defensive win when Congress agreed not to tap into the unobligated provider relief funds to help pay for its current infrastructure bill. Second, it had previously been reported that roughly $24 billion remained in the provider relief funds. On July 19th, the Government Accountability Office reported a much higher amount of unobligated funds of $43.7 billion. In addition, there remains another $8 billion in relief funds earmarked for rural providers, bringing the total unallocated and undistributed funds to about $52 billion. As far as timing goes, we don't know. But we do understand that a program is at the White House for final approval which would assist providers based on lost income and increased expenses during the second half of 2020 and the first quarter of 2021. Given D.C.s current attention to the infrastructure bill, our understanding is, that movement toward final approval and execution will wait until the current infrastructure bill is done. Another positive development is that CMS has agreed to not change the PDPM formula until at least October 2022. This is certainly welcome news for a sector that is still very much battling the effects of the pandemic. Finally, the Delta variant war, as I mentioned, we'll leave the predictions to the scientists and statisticians, but we can say both, based on the report this week from the American Health Care Association and the anecdotal reports from our tenants, that infection rates among nursing facility residents and staff are not climbing at anywhere near the rate being experienced in the general population, and so far nursing homes remain some of the safest places to be in America. With high vaccination rates, accurate rapid testing on site, which we did not have this time last year, and full infection protocols in place, we are hopeful that the Delta wave will be nothing like the original outbreaks in 2020. With that, I'll pass the call over to Mark to talk about investments. Mark?

Thanks, Dave, and good morning, everyone. In Q2 in sense, we continue to be aggressive on the acquisition front with two investments that we believe will be accretive to not only us, but our operators as well. First, at the end of April, we acquired a 123-bed SNF for $9.8 million in an off-market transaction brought to us by our tenant, Bayshire Senior Communities. The facility was a value-add opportunity in a secondary market here in Southern California, and the prior operator was a single asset mom-and-pop provider. It was a great match for Bayshire, whose principles have extensive relationships and operating experience serving higher acuity patients from that market, who have consistently been exported to other markets due to a lack of sophisticated local care. Bayshire is now bringing that level of operational sophistication and quality care at the facility, and the community response has been gratifying. Second, earlier this week, we announced the acquisition of two state-of-the-art skilled nursing facilities located in Austin, Texas, which we leased to the operating affiliates of the Ensign Group. The facilities add to Ensign's existing footprint in Austin and strengthens their position in Texas, which they cited on their call last week as one of their highest performing states. For CareTrust, the transaction allowed us to grow with the bluest of blue chips in Ensign, in a state we like and in arguably the hottest real estate and growth market in the country. The two assets, which were both constructed in 2017, were purchased from the original developer in an off-market transaction for approximately $32.5 million, inclusive of transaction costs. Ensign opted to make an upfront rent reduction payment of $5 million in closing in the annual cash rent under the existing master lease to which the facilities were added was increased by approximately $2.2 million. This produced a first-year cash-on-cash yield to CareTrust of approximately 8%, which is lower than our typical going-in yield on SNF assets, but obviously reflects the credit and operating strength of a premier operator in Ensign. Both the California and Texas transactions were funded using CareTrust's $600 million unsecured revolving credit facility. Through today, we have invested $184.1 million, so far this year, and we will continue to press forward on the acquisition front to hopefully finish off the year with the kind of external growth results you are accustomed to seeing from us prior to the pandemic. As for the market, deal flow has been somewhat consistent over the past few weeks and months with a number of one-off skilled nursing facilities hitting the market with very little volume for small-to-mid sized portfolios. On the seniors' housing front, we're seeing the entire range from half empty turnarounds to performing Class A product. I can say, as a whole, in both the skilled nursing and seniors' housing spaces, pricing at this point in time is dislocated from property level performance. But we continue to underwrite carefully and look for opportunities that fit us and our operating partners. Lastly, our pipe has been reloaded back to our historical range of $100 million to $125 million. The pipe is made up of singles and doubles, and we continue to pursue pieces of larger portfolios that look interesting to us. The pipe opportunities will allow us to do tack-ons with some of our existing operators and also begin new relationships with operators that we have recorded over the past 12 months to 18 months. Finally, the composition of the pipe is largely SNFs, with a few potential mezzanine loan relationship opportunities that we think could be a good long-term fit for SNF investment thesis. Please remember that when we quote our pipe, we only quote, deals that we are actively pursuing under 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 to Bill to discuss the financials.

Thanks, Mark. For the quarter, normalized FFO grew by 11.4% over the prior year quarter to $35.8 million, and normalized FAD grew by 13.5% to $38.1 million. On a per share basis, normalized FFO grew by 10.2% over the prior year quarter to $0.37 per share, and normalized FAD grew by 12.3% to $0.40 per share. During the second quarter, we issued $400 million in new senior notes due in 2028 at an interest rate of 3.875%. The proceeds of the issuance were used to pay off the 5.25%, $300 million senior notes due in 2025 and the related call premium, recent expenses of the issuance, and the remaining funds were used to pay down the revolver to about $50 million. More on this transaction and the quarterly impact from it can be seen in our supplemental, on Page 6. Moving on to guidance. We are raising our previously released guidance by $0.02 on both ends of the range. For normalized FFO per share to $1.48 to $1.50 and normalized FAD per share to $1.57 to $1.59. This guidance includes all investments and dispositions made to date, a share count of 96.9 million shares, and also relies on the following assumptions. One, no additional investments, dispositions or rec-con [ph] 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 $60,000 of straight-line rent. Three, interest income of approximately $2 million. Four, interest expense of approximately $24 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 is a $10.8 million charge that we will take in Q3 related to the refinancing. The $10.8 million is made up of $7.9 million of redemption fees and a $2.9 million write-off of deferred financing fees. And five, we are projecting G&A of approximately $19.6 million to $21.5 million. This range is up approximately $600,000 over the previously released guidance due to certain hurdles being met relating to our short-term incentive compensation program. Our G&A projection also includes roughly $7 million of amortization of stock comp. Our liquidity remains extremely strong with approximately $25 million in cash, $500 million available under our revolver, having drawn $50 million on its subsequent to quarter-end, and we produced roughly $12 million in cash after we pay the dividend every quarter. We also raised almost $7 million of equity off our ATM, at an average price of $24.05 during the quarter. Leverage also continues to be strong and a net debt to normalized EBITDA ratio of 3.7 times today. Our net debt to enterprise value was 22.1% as of quarter end and we achieved a fixed charge coverage ratio of 8.1 times. Lastly, cash collections for the quarter came in at 100% of contractual rent, and July came in at 96.2%. I would expect August to be much like July based on the color given on the call today. And with that, I will turn it back to Greg.

Thanks, Bill, and thank you, everyone. We hope this discussion has been helpful for you. We'll turn it now back to Christy to start the Q&A. Christy?

Certainly. [Operator Instructions] And your first question is from Juan Sanabria of BMO Capital Markets.

Hi, good morning. Just hoping you could talk a little bit about the seniors' housing performance on the assisted living side, with basically flattish occupancy. What do you think is holding that back? We've seen a bunch of your peers who are both AL and IL, exposed has a bit better bounce off the bottom. So just curious if it's maybe smaller facilities or labor constraints that you kind of touched on, but any color on the lack of growth and occupancy would be helpful. Thank you.

Thanks, Juan. This is Dave. What we've heard from our operators is that some local restrictions on visitation has been a challenge, staffing has also been challenging for some of them in order to grow the occupancy. We do have – the occupancy numbers that we gave are really through June, but we do have some more real time info that's more positive. We're seeing in some parts of our portfolio some real momentum in occupancy. And as we sit here today, from July even to August, that's going to – if it holds for sure, a pretty good improvement over what we've reported through June, in a particular state, for example, we had some buildings in Michigan that were at 73% occupancy in June, that are today at 79% and projecting to be at 82% by the end of this month. So we just – we did have some – a bit of a stalemate there, but it looks like we're starting to pick up some good momentum.

Are there restrictions on visitations for some of your operators? And are those self imposed or mandated by local authorities?

By large the restrictions have been lifted as the most restrictive – restrictions were in place last year, but that was – so that has – as we sit here today, has been mostly lifted. And some operators – every operator approaches their policies a little bit differently, some are more cautious than others. But at this point, I think all of the facilities are open for business and open for admissions, with one exception, where we have one building in the portfolio that we're aware of, that is dealing with a bit of a small outbreak of the Delta variant.

Okay. And maybe a question on the balance sheet with regards to how willing you are to get more aggressive in kind of [indiscernible] into your historical targeted range seeing at 3.7 [ph] very cautious and conservative. But are you at the point where you're willing to become more offensive? Or given the Delta variant, you'd prefer to kind of stick where you are and keep it low and just have that insurance policy?

Juan, this is Greg. We've always been learning to be more aggressive if the situation or opportunities rather merited it. That's why we keep it low. It's not really a cushion, although it works that way. Our thesis for keeping it low is that we want to be able to do the big deal when it comes along. And now it's probably not the time for that. As Mark mentioned in his prepared remarks, pricing for all assets is rather severely dislocated from normal underwriting standards and the realities on the ground. And so we are still sitting on that dry powder, but we will not hesitate to use it when the time comes, if the time comes.

Thank you.

Your next question is from Jason Idoine of RBC Capital Markets.

Hey, guys. I'm just wondering how we should be thinking about investments today. I think last quarter you guys mentioned that there could be some larger portfolios that you guys were looking at, and it sounds like today, it's mostly singles and doubles. So I guess have those larger portfolios just not come to the market, maybe to the level that you had expected? Or what are you guys seeing on the acquisition front?

This is Greg. I'll take that and then Mark can fill in if I miss anything. Look, there are couple of larger portfolios out there. We think we see everything that comes through the marketing, as this quarter demonstrated, we actually see stuff that doesn't come to the market. So we've got a pretty comprehensive view of what's going on. And we would just tell you that the portfolios always carry a premium that's seldom justified, but just the norm. And in the current environment, it's really tough to get to the pricing that some are willing to pay for the larger portfolios. So we've always said that that, that we are opportunistic buyers, and that if the opportunities weren't there, we were always comfortable taking our money and heading for the sidelines. We're not on the sidelines now, as you're seeing, we were having a pretty good year so far. But it has required us to really get in and beat the bushes and do a lot of this on smaller deals. The portfolio that we acquired in March was four buildings, but a $125 million, so that wasn't small. But right now, with our pipeline at $100 million to $125 [ph] million, it really is seeing us in doubles and the big portfolios are kind of priced out of range, especially, considering the financial distress that still lingers across the industry. Mark, do you have anything to add?

Yes, just – I would just say that if – when you're looking at larger portfolios, you're oftentimes looking to partner with operators, who – their situations can change from time to time. And so depending on what happens with Delta, they may or may not be in a situation to take on more buildings into their portfolio. So it's a little bit of a fluid situation in terms of matching assets with operators assuming that we can get there on pricing.

Got it, okay. And then in terms of the provider relief funds, so there is $52 billion left, I guess, what would be the expectation or what would prevent them from distributing that full amount as opposed to like holding some of that back? I guess, what your guys expectation there and then what's the potential in your eyes of seniors housing getting a chunk of that?

Yes, this is Dave. Good question. The expectation is that, the whole $52 billion would be in play eventually. There was some – there is some talk about holding some back to correct mistakes from previous phases, either miscalculations or money going to the wrong operator, because of changes of ownership that sort of thing, but that essentially still distributes all of the money. We have not heard any reporting or rationale for them to withhold any dollars from providers. We also – it's our understanding that this phase, for that is, on deck would include seniors housing operators, but at this point, we can't promise that, that's just what we've been told by those who are closer to it than we are.

Got it. Okay. Thank you, guys.

You bet. Welcome.

Thank you. Your next question is from Jordan Sadler of KeyBanc Capital.

Hey, this is Arthur Porto on for Jordan. Just one question for me. We noticed that you closed your first acquisition alongside Ensign for the first time in a while, maybe even since you spin-off of the company. Is this the beginning of a more active relationship with Ensign or was this more of a one-off transaction? Thanks.

Arthur, this is Greg. Look, we never didn't, really – didn't have an active relationship with Ensign. What we had was a significant need following the spin-off to diversify the portfolio. It took us a long, long time to educate the investor community as to the benefits of our Ensign concentration. And it wasn't until we were well under 50% concentrated with them, that people started to go. We kind of get that now, as their coverage climbed. So we've always wanted to do things with Ensign. We think the world of those guys as operators. In fact, we don't think there's anybody better out there. And they're just a great partner to have in the portfolio. Finding – they have very, very stringent underwriting and expansion standards. They always have, it's part of their secret sauce. We respect that. And we've tried things over the years, but it's only recently that we've actually found assets in their markets that are a good match for them and been able to do this deal. It was a great deal for them. It was a great deal for us. We love these assets. These are the last assets that Mark and I toured, before the pandemic in late February of 2020, and we just kind of had to keep that deal warm through the turmoil of the last year in order to get it done, but we're very grateful we did it. And we hope that we'll be able to do more deals like that, and more deals with Ensign in the future.

Great, thank you.

Thank you. Your next question is from Steven Valiquette of Barclays.

Thanks. Hello, everyone. Thanks for taking the question. First, if we think about your rent diversification by state, it's on Page 12 in the supplement, this was touched on a little bit, but one of your skilled nursing repeers did note that some of the rising labor pressure in wages can be difficult to manage in states with limited or no COVID-19 reimbursement relief. So, I guess, I'm curious if you can speak at a high level when CTRE's exposure to major states with limited or no COVID relief for operators or lack of exposure, if that's a circumstance, which would obviously be positive from that end. Thanks.

Thanks for the question. Right now, the performance, either positive or stressed, we're really not seeing a connection to that issue. We've been pleased, generally speaking, with how the states have responded with FMAP increases or across the board Medicaid rate increases in the states that – in most of the states that we're in. We feel that the state response coupled with the federal response has been good. But as we've hinted out or talked at directly today, more is definitely needed. So we are anxious to see the phase for funding approved and distributed in the months to come.

Okay, great. One quick follow-up here. So, you guys had a great slide deck back at REIT week, back in June, that I feel like might have been somewhat overlooked in the investment community. So I just had one question around one of the slides in there, not to have to make you tap your memory back. So one of the slides, it was Page 19, but basically it showed your monthly skilled mix occupancy and how that's benefited from the elimination of the three-day hospital stay rule. It showed that it peaked at around 26% in December of 2020, you come back down a little bit in the first four months or five months of 2021, which to me I think it was a little bit surprising. But, so the questions are, what's your latest intelligence on the duration of the suspension of the three-day hospital stay requirement? And then two, if you did have to predict how your skilled mix occupancy will progress for the rest of 2021, how would you characterize it? Thanks.

Yes. Great, thank you. So we were not surprised that the skilled mix has dropped since there – it really correlates closely with the drop in COVID in the facilities. It's almost exact mirror of that peaking in December, vaccine coming in place, and the new cases of COVID has just dropped precipitously since December. And the skilled mix has – so the operators lose those skilled patients, but they are able to – they've been able to maintain a little bit higher average than pre-pandemic levels for skilled mix because of the three-day qualifying stay waiver as you stated. Our understanding is, that is, as of today, which this can change, of course, is still in place through the end of this year. And talking to some of our operators and Ensign talked about this, I think, on their earnings call as well that many of them are believing that they're going to be able to maintain a little bit of an elevated level of skilled mix over pre-pandemic levels throughout this year, impossible to predict, of course, but that's the latest intel that we have.

Okay. All right, great. That's great color. Thanks.

Thank you. Your next question is from Daniel Bernstein of Capital One.

Hi. I guess my question on the Ensign relationship was actually asked, but in that same kind of context, Ensign on their earnings call was saying that some of the properties are – I guess, some of the new properties they are leasing with you were operators that exited the business. And so maybe if you could talk about this. In terms of your pipeline, are you seeing a lot more operators exiting the business than before or maybe pre-COVID? And are any potential tax implications coming out of the federal government, may be an impetus for that? Thanks.

Hey, Dan, it's Greg. The operator that Ensign replaced in those two Texas buildings are not exiting the business, they were just exiting that – those particular facilities. But they are still around in other places. It had been for a long time. In terms of what's going on out there with the stuff that's on the market, we do hear from time to time that people are motivated by fear of capital gains rate, tax increases coming possibly in the future, but that really is not the biggest motivating factor for anyone to sell. Usually there's other stuff going on, and we are addressing that as best we can in the deals that we chase. But no, we are not – it's logical, but we're not seeing tax motivations for these sales.

Okay. All right. That was the only question I had. I appreciate it. Thanks guys.

You bet.

We have no further questions. I will turn the call back over to management for any additional or closing remarks.

Hey, Christy, we just saw one more pop up in your queue.

Yes, we have Jonathan Hughes of Raymond James.

Hey, good afternoon. Thanks for squeezing me in, I appreciate it. Bill, can you go back to guidance. I don't know if I heard you correctly or mistakenly, but did you say you expect rent collections going forward to look a lot like July, but the guidance includes no rent shortfall?

Yes, I did say that. I expect August collections to be a lot like July, but I – but as we said in the prepared remarks, we expect to be made whole on a 100% of contractual cash rent by the end of the year.

Okay.

So...

So the cadence would then be for like third quarter may be down a little and then reverse itself in the fourth quarter?

Yes, but we're keeping, we're currently keeping the tenant that we mentioned on an accrual basis, because we feel the collections are probable.

Okay. That helps. And then, I don't think I heard anybody talk about the covenant. The coverage dropped a little there. Can you just maybe talk about what happened there? Any concerns on that portfolio?

Sure, Jonathan, it's Dave. Covenant care, it was among the hardest hit in our portfolio. From a census perspective, they dropped from around 90% occupancy pre-pandemic down to 70%. And labor costs were also hit hard there. They're build – there are six buildings with us, are a small piece of their overall portfolio. But they are in rural markets that have just had a little bit of a harder time with COVID, than the rest of their portfolio, which is more urban based and is recovering a lot better. So they were covering really well before the pandemic. We think they've bottomed and are on their way back, and the parent company credit is, it gives us no cause for any concern in the short run.

Okay. And that's all skilled nursing, right, it's not seniors housing?

That's right.

Okay. And then just one more from me, for maybe Mark or Greg. Given this dislocation in pricing versus fundamentals for acquisitions, I think is how you framed it, would a potential sale of some properties – could this environment give you an opportunity to perhaps move on and try to deploy capital elsewhere? And there may be a better option than working with some of these operations, until things recover over the next few years. I guess, I'm just getting at – is there any potential for capital recycling in the next six months to 12 months?

Well, Jonathan, it's Greg. We did mention in our prepared remarks one facility that we are – we've now slated for sale, it's a – that will be a very, very small deal, immaterial in fact. But we don't really look at the portfolio that way. Our portfolio is relatively young and has not had a lot of time to appreciate significantly in value. And so we don't see a lot of big upside in the value of our facilities that might be captured with a sale like that. We're not against it. We just don't see it right now.

Okay. Yes, I didn't see that – than one in Noble, I would guess, there was just more asking on a larger scale, but you just addressed that, so. Okay, that's all I had. I appreciate the time. Enjoy the weekend.

You too.

Thanks. You too.

We have no further questions.

Very good. Well, thank you everyone for being on. We hope you have a nice weekend, and as always, you know where to reach us if you have any additional questions. Take care.

Thank you. This does conclude today’s conference call. You may now disconnect.