Good day. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the CareTrust REIT First Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Senior Vice President, Lauren Beale. You may begin your conference.

Thank you and welcome to CareTrust REIT’s first quarter 2023 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 hesitate to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances or for any other reason. During the call, the company will reference non-GAAP metrics such as EBITDA, FFO and FAD or FAD and normalized EBITDA, FFO and FAD. When viewed together with GAAP results, the company believes these measures can provide a more complete understanding of its business, but cautions that they should not be relied upon to the exclusion of GAAP 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 website at www.caretrustreit.com. A replay of this call will also be available on the website for a limited period. On the call this morning are Dave Sedgwick, President and Chief Executive Officer; Bill Wagner, Chief Financial Officer; and James Callister, Chief Investment Officer. I’ll now turn the call over to Dave Sedgwick, CareTrust REIT’s President and CEO. Dave?

Good morning, everyone and thank you for joining us. Before handing the call over to James and Bill, I’ll address three topics: investment activity since our last call, a portfolio update and some thoughts on the regulatory environments. First, back in November, we talked about how we anticipated that more deals would be steered our way as sellers grow frustrated with delays and retrades due to the tighter credit markets. Today, we are pleased to report that that increased flow of deals has occurred and has begun to result in exciting new investments for us. Since our last call, we have successfully closed on three transactions, totaling 3 skilled nursing and 2 seniors housing facilities for a combined $47 million. The stabilized blended yield for these deals comes in at 9.6%. And as meaningful as these investments are to the company this year, maybe more importantly, these deals officially start three new relationships with operators, we believe, will not only improve the lives of employees, residents and patients at these facilities, but also fuel future growth opportunities for CareTrust. The pipeline today sits at between $150 million to $200 million. Second, the existing portfolio is overall in very good shape. Since the very start of the pandemic, we expanded the way we report coverage to three views: pre-pandemic, excluding provider relief funds and amortizing provider relief funds through their eligible periods. Excluding the relief funds, trailing 12 property level EBITDAR coverage for the portfolio through December 2022, remained strong overall at 2.01x compared to the 12 months leading up to September 2022. Last quarter, I gave more color around one skilled nursing operator, not in our top 10 with negative lease coverage that accounted for roughly $5 million of contractual rent. At the time of last year – last quarter’s…

Thanks, Dave and good morning, everyone. As Dave mentioned, this year, we are off to an exciting start with approximately $47 million in new acquisitions, consisting of 3 transactions, 5 facilities and 3 new operator relationships. At the end of Q1, we closed on a 280-bed two facility skilled nursing portfolio in Texas and Kansas. We paid approximately $17 million for the portfolio with the Texas facility being a tack on to our existing master lease with momentum skilled services and the Kansas facility being leased to Summit Healthcare Management, a new operator for us. Combined stabilized annual rent for these facilities is approximately $1.69 million. Next, earlier this month, we have closed two transactions with each starting a new operator relationship. First, we acquired a 148 bed skilled nursing facility in the Atlanta metro area for approximately $12 million and leads to the same to the Elevation Group. An operator founded by Brothers Ken and Dan Funk two industry veterans with many years of combined experience operating skilled nursing facilities. The annual rent for this property is approximately $1.14 million. We followed the Atlanta closing by acquiring a 136-unit two-facility memory care portfolio in the Chicago area for approximately $18 million. We leased these buildings to chapters living a Midwest-based memory care operator in its early growth stage and co-founded by Danny Stricker, an experienced leader in the senior housing industry. The initial annual stabilized rent for chapters is $1.7 million. These transactions reflect what is one of our top priorities this year, a return to acquisitions. Given the current lending environment, we continue to opportunistically pursue actionable deals where we feel our access to capital, low execution risk and reputation of the quality transactions partner make us a particularly attractive buyer. A sustained return to acquisitions requires that…

Thanks, James. For the quarter, normalized FFO decreased 2.4% over the prior year quarter to $35 million. Normalized FAD decreased by 3.5% to $36.6 million. On a per share basis, normalized FFO decreased $0.02 to $0.35 per share and normalized FAD also decreased $0.02 to $0.37 per share. Rental income for the quarter was $46.2 million compared to $47.7 million in Q4. The decrease of $1.5 million is due largely to the following four items: the first two of these items were discussed on last quarter’s call. First, we received approximately $1.2 million less of cash rents from tenants who are on a cash basis. $700,000 of which related to exhausting the security deposit of the negative coverage tenant in Q4. Second, we received approximately $1.1 million less cash related to a prior tenant in Q1 than in Q4. This $2.3 million decrease was offset by third, an increase in rents from CPI bumps of $319,000 and fourth, a write-off of a straight-line rent receivable of $440,000 in Q4, but none in Q1. Interest income was up $308,000 mainly due to a fee paid on a $15 million note that was paid off at the end of Q1 as a result of the payoff I would expect interest income to be more like the Q4 number less $500,000, which was the quarterly interest on the $15 million note. Interest expense was up $219,000 from Q4 due to higher interest rates, offset by lower borrowings under the revolver. Subsequent to quarter end, we drew $30 million on the revolver for acquisitions. G&A expense increased $248,000 from Q4 due to higher short-term incentive compensation, offset by lower stock compensation and other corporate-related items. The big decrease in stock compensation is due to stock forfeitures that occurred when Mark Lamb left the company.…

Thanks, Bill. We hope our report has been helpful, and thanks for your continued interest and support and be happy to take your questions now.

Thank you. [Operator Instructions] Your first question comes from the line of Steven Valiquette with Barclays. Your line is open.

Thanks. Hi, everyone. Thanks for taking the question. Just a question here, maybe just kind of looking at Page 11 in the slide that just kind of the geographic diversification. And obviously, with just so much of the portfolio concentrated in Texas and California. Just curious if you have any just updated thoughts on the state Medicaid rate updates in those two states, in particular, just given how critical they are to the overall geographic footprint of the property portfolio. If any other states just stick out one way or the other curious any other thoughts, other states that you think are critical as well as far as just the overall Medicaid rate outlook and updates that are happening this year. Thanks.

Yes. Thanks, Steve. California seems pretty settled in terms of the operators there and their outlook. They feel like the certainty that they have, the visibility that they have to the path for the Medicaid rate increases there are good. We feel comfortable with California. With Texas, that literally is, since the legislature there is currently in session. A day by day, a couple of times a day conversation with some of our operators that are there. Texas. We love the state. They’re long overdue rate increase. There’s probably more optimism about an increased passing than we’ve seen in a long time but we should know in the next couple of weeks, how that’s going to pan out. Regardless, both California and Texas represent not just states that we like, but states with some of our very best operators who have strong coverage and great teams. So we’re not really sweating the news coming out of those two states.

Okay. Alright. Any other states worth calling out just besides those kind of big two? Or is everything else just kind of status quo and that material one way or the other from your perspective?

Most of the other states have already passed some sort of FMAP adjustment. And we – again, we’re not concerned about the other states and what they’re doing on the Medicaid front. We wish that some would have done more and some would have moved earlier. But nothing probably worth noting on this call.

Okay. Alright. I appreciate it. Thanks.

Thank you.

Your next question comes from the line of Jonathan Hughes with Raymond James. Your line is open.

Hi. I look forward to next quarter when we can have more guidance clarity. So I won’t ask about that now since you already talked about it. But I do want to ask about EBITDAR coverage ex HHS funds outside the top 10 tenants. I saw that’s dropped by about 20 basis points or so from last quarter. Was that because of the 3% operator went further into negative coverage territory? Or was it deterioration from other operators? Just trying to get that breakdown since you had quoted that number last quarter?

Yes, Jonathan, primarily, it’s primarily that negative EBITDA coverage operator. If you strip that one operator out, then that line item goes from 0.88x to 1.73x.

Thank you. And then turning to acquisitions, the recent yields on some of the investments completed this current quarter we’re in or in that mid- to high 9s. That included a few assisted living facilities, which is higher than I would have expected for seniors housing. Are you seeing yields on assisted living facilities approach those of skilled nursing within your investment pipeline? Or was that a bit of a unique situation?

I think in a general matter, Jonathan, I would say yields on seniors is creeping up a little bit, but still mid- to high 5s for the most part – mid to high 8s for the most part. I would say that the yields on the investments we’ve done this year so far in seniors are more a factor of where we feel like we’ve been able to get a really attractive basis based on the circumstances behind why the sellers want to get out, and that kind of allowed us to go a little higher on the yield underwriting with the tenants because there’s going to be room there based on a lower basis.

Okay. And are those three new relationships year-to-date? Are they subject to exclusivity agreements, meaning if they have potential expansion plans in the future that you would have the right to take a first look at financing any of that growth?

A couple of them do, but it’s somewhat soft. Jonathan, it’s kind of maybe a ROFO if they’re looking to finance or do a REIT kind of deal that kind of approach us first. It’s a little bit soft, but that’s kind of what we get from them. But if we’re – if they’re going to go do redeals, they bring them to us for us to look out with them to see if we can come together.

Got it. Okay. And then one more for me. I saw a few assisted living facilities were transitioned to pennant. Will those be added to the tenant guarantee by Ensign? Or are those separate from that?

Those are separate from that guarantee.

Okay. Alright, that’s it for me. Thanks for the time.

Thanks, Jonathan.

Your next question comes from the line of Austin Wurschmidt with KeyBanc. Your line is open.

Great and good morning out there. With respect to the non-tenant update, I mean, is the partial rent payment a reflection at all of a gradually improving situation just like we’ve heard more broadly around labor, occupancy and with the Medicaid rate increase, that are coming in July, could operations improve to a level where you could reach a resolution that might result in a rent cut and maybe a lease extension or do you think that moving away and moving on from this asset is a more likely outcome, just trying to get curious where your thought process is right now?

I think at this stage in the discussions, it’s just – it’s too early to speculate. Like I have said, either in our – in my remarks or in the press release, all options are really on the table right now. They really did just last week solved for the CEO that they had terminated right before last quarter’s call. And they have been taking some time to figure out their priorities and where they want to take things. Could we end up selling this portfolio this year, we certainly could. But a lot of discussion still has to take place with these guys to figure out what they want to do and what’s the best path forward for both parties.

Understood. Has anything changed with respect to these locations and quality of the assets versus when you initially underwrote them? And I think you partially answered this, but would you expect a resolution one way or another before the end of the year?

Well, certainly, the financial situation has deteriorated significantly compared to when we originally underwrote them. Occupancy took a big hit during the pandemic going into COVID, they were performing pretty well. And they just – this is probably the portfolio that got hit hardest and performed the poorest in our portfolio because of COVID, and they have been having a hard time recovering. My hope and expectation is that we will have something resolved before year-end.

And then, Dave, with respect to the minimum staffing requirements you spoke about, which kind of remains in process. But based on what you know now, what percent of your tenant base would you consider being kind of at risk of a potential mandate? And are you looking more closely at staffing and your underwriting of new deals?

I hate to say it, but it’s really impossible to comment on that because we don’t know what the final form is going to be on the regulation. We don’t know for example, what staff is going to be included, will administrative staff be included or not. Well, non-nursing staff being included, somehow. There is just too many variables there to comment on it. And so we will just have to wait and see how it finally comes out.

That’s fair. Thanks for the time.

Thanks.

Your next question comes from the line of Michael Carroll with RBC Capital Markets. Your line is open.

Yes. Thanks. Dave, I wanted to stick on this 2.8% tenant. I know last quarter that you are highlighting that the situation could be resolved or at least do you have some type of plan by the time you report it today. Is there something going on, I guess what’s – how is that situation evolving? And is it, this hasn’t surprised you that taking so long?

I was hopeful that we would have a more meaningful update for you, but I am not necessarily surprised that it’s taken this long. It has taken them, I think longer than they expected and that we expected for them to replace their CEO, which just happened last week. And the direction that they want to take the company has been kind of in process and evolving from week-to-week depending on who they are interviewing and what things that they are pursuing. So yes, not terribly surprised, but continue to be hopeful that we will find resolution here quickly. The tone of the conversations with these guys is very friendly and productive. And so we are making progress.

Okay. And is it fair to read through it that they want to keep these assets given they hired a new CEO to start running the company?

That’s a pretty good inference, I think and the fact that they made a full rent payment in March and a partial in April, and we will see what we can get in May. Yes, it seems like they are working on stabilizing the assets.

And are they making progress on stabilizing the assets? And I know it’s hard to look at just the coverage ratios, but it sounds like coverage ratio has dropped pretty meaningfully I mean are they making progress since those were reported?

The kind of progress that we would – that show up in the financials, we haven’t seen it yet.

Okay. And then just last one for me. Can you talk a little bit about the types of investments that you are tracking? I mean are these mostly stabilized deals, or are they really transitions and needing new operators to drive better results. And I guess why I kind of say that is it looks like the summit and the Chapters deals just provided rent abatements. I mean is that abatements for them to improve operating results?

I would say a little bit of both probably. One of the abatements was more because you had a brand-new tenant just launching who needed a little room to start to get through the lag between providing the service and billing and getting the reimbursement. And the other one was very much a – they are working on a turn. They needed a little bit of room to get that turn underway and going before paying full freight on the rent. But they got very short on maintenance.

Yes. Is that similar to what’s in your pipeline right now, too?

Some of that in there, yes, but there is also a mix of other stuff that’s cash flowing and that where a rent ramp really isn’t going to be needed. But there are some where – you have some sellers selling kind of these non-strategic assets and maybe have a half ton of attention paid to them for a little while, so there is easy levers. We talk with the operators about pulling, but it may take a few months to get there. But there is also definitely cash flowing assets in the pipeline that we are looking at that we would underwrite and kind of look to execute on based on our historic yields.

Okay. Great. Thank you.

Thanks Mike.

[Operator Instructions] Your next question comes from the line of Tayo Okusanya with Credit Suisse. Your line is open.

Yes. Good morning out there. I just wanted to follow-up on Jonathan’s question about, he asked about the non-top 10, but I wanted to ask about the top 10 tenants. And there is still a couple of them at this point where their rent coverage is not even close to 1, it’s meaningfully below 1, 0.4, 0.5, 0.6. How do you think about recovery for these type of tenants where again, the coverage is significantly below 1, even if they are current on rent payments?

Well, the way we think about these operators and are not – I am sorry, in our top 10. Specifically, they have something in common, which is they have a really good corporate credit behind them. And they have other properties outside of our relationship that are performing much better than ours. And so we really view it as a matter of time for them to get things back north of 1x coverage. Tricky things for one of these guys Aspen is it’s – that represents just two facilities. So, when you have a situation like that, if just one building is not hitting on all cylinders, it can grow the whole thing sideways from a coverage perspective. But they are a large regional player with a great credit. So, we are not – we don’t think rent will be an issue with any of those guys.

Okay. And then any – along those same lines of thematically, anything specific about why your assets and their portfolios seem to be struggling, but the other assets seem to be doing well, and that’s what’s helping with the corporate guarantee, like what’s uniquely happening at your assets. And I don’t know whether it’s something thematic, whether it’s a case-by-case spaces.

Yes. So, I would say it’s – you would really have to look at it building-by-building. Some of the buildings that they are running for us are doing really well and others are not. And so this business is hyper local. And the way these operators run their business is very local as well. And so getting those right local leaders in place tends to be the primary lever that is needed so that the subsequent levers can get pulled in place.

Okay. That’s helpful. Thank you.

Alright. Thank you.

There are no further questions at this time. I will turn the call back over to Dave Sedgwick for closing remarks.

Well, I really appreciate everybody’s time and continued interest. If there is anything else, please give us a call. Otherwise, we will see many of you in New York at NAREIT in June. Have a great day.

This concludes today’s conference call. Thank you for attending. You may now disconnect.