Welcome to the CareTrust REIT First Quarter 2021 Earnings Conference 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 the 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-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.

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, Alexander, and good morning, everyone. We're pleased to be able to tell you that CareTrust outstanding operators have proven remarkably stable over -- overall thus far in this pandemic.

Most of them aversely confronted the hard task of adapting to the new realities of COVID’s changed operating environments, and those that have are faring well, but how long it will take for occupancy and normal hospital discharge patterns to resume is still unknown.

So as vaccination rates rise and parts of the country begin to emerge from lockdowns, it's important to remember that the pandemic’s effects on the skilled nursing and seniors housing industries are far from over.

For our report, throughout the past year, we've worked hard to stay close to our tenants, collect all of our rents, pursue good acquisition opportunities and carefully guard our balance sheet. Thankfully, having partner with great operators in the first place, we have thus far been able to avoid some of the problems that beset others.

But challenges remain on the horizon, and we will continue to be vigilant. We are pleased to report that we collected the 100% of contract rents in the first quarter. We also collected 100% in April, and we appear to be on track to collect 100% in May.

So despite the continuing headwinds and in light of the continuing government support, we remain cautiously optimistic about our tenants' prospects as occupancy begins to climb back. You saw this yesterday when we increase our 2021 guidance to reflect the recent acquisitions. To be sure, the government supports been critical.

But if you look at page six of our supplemental published yesterday, you will see that we’ve again given our operators EBITDAR and EBITDAR lease coverages, both with and without CARES Act funding.

Most of our skilled nurse in multi-service campus tenants, who account for about 86% of our rental revenue, are performing near to or better than their 2019 coverage metrics without the CARES funding. These particular operators are among the upper outliers in the industry.

And many, in fact, most other providers out there still need that government support. So we continue to hope that the government will see the obvious value in such things extending the waiver the three day qualifying stay well beyond 2021.

And that additional relief funding will come soon and in sufficient quantity to help those who need it to achieve the soft landing that the post acute healthcare system and it's predominantly elderly beneficiaries still need.

For our part, with low leverage, great operator relationships, plenty of liquidity and a great team here, CareTrust remains well positioned to continue growing and pursuing our mission of pairing great operators with meaningful opportunities to transform individual facility then by extension the industry as a whole for the better.

So with that, I'll turn it over to Dave for some more color on what's happening out there. Then mark will jump in with recent acquisitions in the pipeline, and Bill will finish off with the financials. Then, we'll open for Q&A.

Dave?.

Great. Thanks Greg, and good morning, everybody. In Q1, our skilled nursing operators reported a much anticipated bottoming in skilled nursing occupancy. In January, we hit a pandemic error low, but at the end of Q1, our SNFs reported a moderate recovery of 220 deaths.

On the skilled mix front, the question has revolved around the rate of return to the pre-pandemic levels there as well, now that, COVID cases in the nursing homes have materially declined. At quarter end, our operators were still about 440 bps above the pre-pandemic skilled mix norm.

For seniors housing occupancy, and speaking relatively to what we've observed in the broader sector, we're pleased to highlight how resilient our seniors housing operators have been so far. COVID hit them hardest at the end of last year and at the start of this year.

As a skilled nursing senior housing occupancy appears to have hit bottom and thus far has held steady. I wish we could predict the slope of recovery. But at this point, it's just too early to speculate. Our thesis is that we will return to pre-pandemic occupancy and coverage. The question of timing will remain unresolved for some time.

Note again, that portfolio-wide our national commentary is only marginally relevant, since these businesses are hyper-local and extremely sensitive to the quality of the operators running them. Needless to say, we expect the rebound in occupancy to pre-pandemic levels to be asynchronous across the portfolio. Next, let me talk about our lease coverage.

As Greg noted, you seen yesterday's supplemental, a continuation of our enhanced COVID error disclosure, wherein we try to be as transparent and helpful as possible by reporting these coverage on an EBITDAR and EBITDARM both excluding CARES Act funding and including the CARES Act funds received and amortizing them through June of this year.

Stripping out the CARES Act funds, we saw overall portfolio coverage hold steady, ticking up 4 bps to 2.12 times. As we evaluate the length of their runway for those operators who have needed these funds. We remain constructive about the time that they have to climb their way back through this year, and into next.

Lastly, and on a related note, there remains roughly 24 billion in undistributed CARES Act funds. The transition to the new administration has slowed down the processing of those funds, but we understand progress is now being made.

Additionally, $8.5 billion has been allocated for rural providers, and based on preliminary reports, approximately 154 of our facilities would qualify. With that, I'll pass the call over to Mark to talk about investments.

Mark?.

Thanks, Dave, and hello, everyone. As Greg and Dave reminded us, the pandemic remains at the forefront of everyone's mind right now, including potential buyers and sellers. We've not just been playing decent however, we still feel that we have a mandate to grow and we've carefully preserved our liquidity and stayed active in the marketplace.

Thanks to Joe, Josh, James and the entire team here at CareTrust. We started off 2021 by adding over 150 million very nice assets to the portfolio so far. As most of you know, in March, we closed on a very nice 4 billion CCRC portfolio for $126.1 million.

The portfolio was located in extremely strong Southern California submarkets and represents some of the best real estate view purchase, since our start seven years ago. More importantly, we feel like we have matched the right operators with these assets with both Bayshire Senior Living and Aspen Skilled Healthcare stubbing in.

A few days later, we purchased 145 bed sniff in Santa Barbara for $15.8 million with a lease in place with Covenant Care. In earlier this week, we announced the TechOn [ph] acquisition with Bayshire Senior Living as we acquired 123 beds sniff here in Southern California from a COVID weary single asset owner, who is ready to retire.

That building sits in a market that enjoys little competition and deep labor pool and a staff that is eager for fresh leadership and a commitment to quality patient care. We were very pleased that Bayshire sourced and brought that deal to us.

So as we sit here today, we have invested $151.7 million so far this year, and we look forward to seeing what the next few quarters look like in terms of actionable opportunities.

We are pleased to know, the deal flow was picked up in recent weeks, the volume of current opportunities seems to be tilted towards the seniors housing space, we are cautiously optimistic that we will see more and more sniff opportunities as mom and pop operators head for the exits and larger operators pare down their portfolios coming out of COVID.

In speaking with a brokerage community, we expect the deal flow will continue to increase over the coming quarters, as operator fundamentals hopefully trend back toward pre-pandemic levels. As we sit here today, our pipe has been reloaded back to our historical range of $125 million $150 million. Its composition is primarily singles and doubles.

But as usual, we're also investigating a couple larger portfolios that look intriguing. Of the deal on our pipeline, each one is earmarked for existing operator bench, which makes them easy to tack on and provides greater certainty for sellers.

The active pipe is predominantly sniffs with a few senior housing assets that we feel are a great fits for operators in that space.

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 5.5% over the prior year quarter to $34.1 million or $0.36 per share, and normalized FAD grew by 7.4% to $36.1 million or $0.38 per share. During Q1 and as we've done every year, we again raised our dividend this time by 6%.

This increased our payout ratio for the quarter to 74% on FFO and 70% on FAD. This is consistent with our historical pattern. And as usual, we expected to come in over the course of the year, as we hopefully continue to grow the portfolio at solid spreads over our weighted average cost of capital.

Leverage continues to be at all-time lows at a net debt-to-normalized EBITDA ratio of 3.7 times to-date. Our net debt-to-enterprise value was 22.1% as of quarter end, and we achieved a fixed charge coverage ratio of 7.9 times.

As Greg mentioned, with the 2021 investments made today, we are raising our previously released guidance by $0.6 on both ends of the range to normalize FFO per share of $1.46 to $1.48 and normalized FAD per share of $1.55 to $1.57.

This guidance includes all investments and dispositions, made to-date, a share count of 96.1 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 2%, our total rental revenues for the year, again, including only acquisitions made to-date, are projected at approximately $184 million, which includes less than $60,000 of straight-line rent.

Three, interest income of approximately $2 million, four, interest expense of approximately $24.3 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 $19 million to $20.9 million. This range is up approximately $1.5 million over our 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 leverage and liquidity positions remain strong. Year-to-date we have sold approximately 740,000 shares at an average price of $23.66 under a $500 million ATM program that we put up last year, for net proceeds of approximately $17.3 million.

The outstanding balance on our $600 million revolver currently sits at $170 million, and we have approximately $24 million in cash. In addition, as Greg noted, cash collections for the quarter and for April came in at 100% of contractual rent, and may appears to be on track to do the same thing. And With that, I'll turn it back to Greg..

Thanks, Bill. Thanks, everyone. We hope this discussion has been helpful to you. We appreciate your continued interest and support, and with that we'll be happy to answer questions.

Alexander?.

Thank you, sir. [Operator Instructions] You have your first question from Steven valid credit with Barclays. Your line is life open..

Steve?.

Sorry guys. I was having a temporary work-from-home crisis with company. I apologies. So, yeah, look, congrats on these strong results. Good to see the guidance increases, and we're studying the coverage ratios across the largest bank and everything looks pretty solid there as far as whole portfolio.

Just wanted to hear more about pace of occupancy recovery, it definitely seems like across the industry, what's happening much faster in sniffs overall certainly versus senior housing.

You mentioned there’s still choppiness and the sniff occupancy, recovery and maybe across some operator, just want to hear more about the volatility and the sniff side that I think you alluded to? Thanks..

Yeah, thanks for that question. There's not a whole lot of color to give. We’re really early in -- really just weeks away in some cases from seeing the bottom, depending on the facility in the local market that you're talking about.

So I think, I hope that next quarter, we'll have some more color to share, a little bit more of a track record in time from what we would call the bottom. Like I said, in my prepared remarks, when you're talking about the skilled nursing sector, occupancy, it's really difficult to do that.

Even across the whole portfolio, much less the whole country, you really have to look at it operator-by-operator, and some markets within the same state will recover at very different paces. And so hopefully, we'll have some more color to give you next time..

Okay. One quick follow-up. I mean, there's so many positive things going on. I hate to focus on a negative.

Is there any -- are there any signs, maybe just in a few geographies here and there where perhaps home health is taking some share from sniff during the recovery phase? And that's maybe causing some of the volatility, or is that not really a trend that you're seeing? Just curious, any high level thoughts around that as well? Thanks..

Yeah. You bet. Our operators haven't attributed occupancy issues to home health, per se. It’s been more of a function of how their market has been impacted by COVID and how the hospitals in their markets have been impacted by it. I'm sure that that may have something to do with it, but we don't have any real insight from our operators on that front..

Got it. Okay. All right. Thanks..

Yeah..

We have your next question from Michael Carroll with RBC Capital Markets. Your line is open..

Yeah, I want to talk a little bit about, I guess, your investment activity.

And I think Mark, you answered this last quarter, but can you talk a little bit about how you're underwriting deals today, are you expecting operations to hit pre-COVID levels, or how big of a safety margin do you require on from these transactions?.

I don't think it's too dissimilar from what we said last quarter.

I mean, you obviously need to understand what the run rate was pre-pandemic from a margin perspective, from an occupancy perspective? And you need to look at 2020 numbers to understand on the expense side, what is below? And then really, it's getting in the views with our operators to understand, what specifically is not going to come back down on the expense side? And then on the occupancy front, I don't think anybody is expecting to get back on overall occupancy.

We're certainly going to underwriting overall occupancy to get back to pre-pandemic levels for a period of time. So, I think, as we've done historically, we always look at each asset, and look at where the low hanging fruit is? What the one changes can we make? Historically, we've changed operators.

And so we continue to stick to our knitting on that front and see what we can -- see we can churn on the expense side.

As far as top line and occupancy, it's really understanding those local markets and understanding why occupancy should get back to pre-pandemic levels is a relationships with the hospital or physician group in that particular sub market.

But I would say, overall, we're not assuming that if a building historically is run maybe 90%, low 92% occupancy, we're not assuming that we're going to get back there in the near-term.

So what does coverage look like? What does coverage look like with maybe 80% or 85% occupancy? And what assumption did we make for skilled nurse?.

Okay.

And then, what are you seeing on the investment opportunities side from the smaller operators that might want to exit the business? It sounds like you had a few of those in your deal activity that you just recently completed? I mean, is this expected to grow and over time, we think that some of the sniff volumes that you were able to find is going to, I guess, maybe exceed what you're doing maybe even a few years ago, just because there's a bigger opportunity set?.

That's an interesting question. I mean, there’s an awful lot of capital on the sidelines waiting to pounce. I think today is as competitive on the SNF acquisition front as it’s ever been, just due to the lack of supply.

So I think the first part of your question is, will more and more mom-and-pops head for the hills? Potentially, do the larger guys kind of pare down on assets that strategically don’t fit? Whether that's kind of the regional, super regional or even the large players with 100 plus buildings.

So, I mean, we would expect to see deal flow coming from those buckets. But at the same time, in terms of what we will be able to grab -- that will be interesting, because there’s a lot of competition to acquire skilled nursing assets today.

In private, very sophisticated buyers, oftentimes with operators and or an operating arm to their real estate company, are very nimble and are very competitive with us. And so, it'll be interesting to see what volumes we'll be able to do over the next couple of years.

But I think we'll have our fair share of opportunities as we've seen them over the past few.

Greg, do you have anything to add?.

No, I think that’s a great answer..

Okay. Last one for me, I appreciate that.

Can you talk about some of the larger transactions that you mentioned in your prepared remarks? I mean, what type of deals are these? How big are they? It sounds like this is going to be an operator going to be transitioning out?.

Yeah, I mean, I really can't comment too much on these opportunities. I mean, we're seeing opportunities, both on the – on the sniff and affront or seniors housing front. So they range in size, we've always kind of hit on a – on a chunky, good size deal.

If you look back at our historical kind of investment pipeline, and so we're always taking a look at the larger, the larger transactions that, potentially can help us make our year. And this year is no different.

And so, we're tracking a couple that are on market, a couple that are that are not on – on the market, and we'll see what happens, but I think it's premature for us to comment on them at this point..

Okay. Great. Thanks. I appreciate it..

We have your next question from Connor Siversky with Berenberg. Your line is open..

Hey, everybody. Congratulations on the print.

I'm just wondering, if we could get a little bit more color on maybe a backlog of surgeries for the relevant population and how referral patterns are looking now, maybe versus pre-pandemic levels? And if there's any sense of how close we are to a normalized basis on any of those metrics?.

Well, that's a – that's a – that's a great question Connor. And unfortunately, we don't have a ton real time Intel, on what's happening in the hospitals we get it from being close to our operators and hearing what they're saying, in terms of hospital flow.

We were paying attention to the public health systems and hospitals, and what they're talking about. And in some of those recent earnings calls, we took note of some optimism event that that they're expressing that, there is some pent-up demand is coming back.

The – the elective surgeries are a little bit of a – I think a misconception, since the vast majority of the nursing home patients that are admitted from the hospital actually started their journey through the emergency department, not necessarily conveniently scheduled, elective surgery.

And to the extent that, the nation or really, for us, the individual markets are still in some form of lockdown, wearing masks, not going out and living life as normal. There's going to be a little bit of a constraint on people going out and living their lives again, which – which leads to that hospital volume.

That's actually precisely what some of the hospital or health systems talked about in their – in their remarks recently. And it's something that we've always understood and tried to talk about as well. So the key kind of lead indicator for us is going to be that – that the restrictions related to COVID entirely are lifted.

And people will get back to their normal lives. Hard to imagine that, our occupancy fully recovers before that happens..

Thanks. That's very helpful. And I know, you guys had mentioned the skilled mix earlier in the call.

Just wondering, if there's any sense of what it could look like, maybe at the end of this year, or perhaps the end of 2022?.

Nope..

That's fair enough..

Hey, Connor. That's the correct answer, but we can probably give you a little more color on that. I think as you know skilled mix has been elevated, as our skilled nursing operators have been able to skill people in place due to the waiver, the three day qualifying state and because COVID was a qualified patient for skilled.

We can still skilled in place which is a great thing both for residents and for our operators and for the healthcare system in the payors. But COVID is down precipitously, thankfully, across the portfolio, and so we're just not seeing as many opportunities or needs to skilled patients.

And so we do expect that skilled mix to decline over time as Dave said in his prepared remarks to sort of a pre-pandemic norm. Question is how fast that will happen.

And because that skilled mix and some of the extra revenue that comes with it has backfield, some of the revenue loss to the occupancy drop question is what the matches is going to be like, between the occupancy recovery and the skilled mix normalization.

So we're watching that really, really closely to see what happens and hoping that those elevated skilled revenues will continue to at least mitigate some of the occupancy revenue loss.

Does that make sense?.

Yep, yep.

Do you think there's any sense that you're getting to the lower bound of length of stay reductions?.

No. I don't think -- I haven't heard of any pressure on length of stay.

I don't know, Eric, but I do have a -- have you seen something on that?.

No. We do look at length of stay over time. And it has stayed pretty consistent over the last several months, but it is something we look at, but it's been fairly consistent..

Okay. That's all for me guys. Have a good weekend..

You too, Connor..

We have your next question from Todd Stender with Wells Fargo. Your lines is open..

Thanks. Probably for Mark, just to get a sense of your risk appetite right now for both skilled and assisted living deals. Assuming, you're losing out on some deals, what do you think the underwriting is out there? As far as growth, coverage, is there anything you can share on stuff that maybe you're being conservative on and maybe rightfully.

So any comments on deals maybe that you're losing?.

Yeah. I think we always start kind of in and around 9%, 9.25% and are going in these yield, as we've talked about over the years, we want to give up a little bit of yield for coverage.

So just in terms of losing out, I think there are groups that have the ability to go into the eighth, and in some instances, maybe the high 7s the private guys because, they're spread overhead is being, in some cases, 400 to 500 basis points.

So I think it's those groups that are willing to shave to kind of go down into the high 7s that we're missing out too. So kicking in the, maybe are a little more free in terms of what sort of terms they t need from a transactional perspective going in the floor. And in terms of guarantees and that sort of thing.

So we're -- and sometimes on a transactions, we want to make sure that, structurally, it's right for us and it's right for our tenant. And if it's not then obviously, you got to get the underwriting and the economics, right. But you also got to get and make sure that the transaction is structure is right for both the landlord and the operator..

Okay, thanks. And then probably shifting to build is for funding the growth, maybe the build off of Mark's comments about the HUD financing with low coupons.

Can you speak to your willingness to solely tap the debt markets right now? Certainly its -- pricing terms remain in favor of borrowers, you're below your targeted leverage range, maybe just think -- thinking through how you can fund deals with pretty low cost unsecured debt right now?.

Yeah, rates still remain extremely low. And that is an attractive source of financing for us.

Depending upon invest -- investment flow size is going to dictate a lot of how we finance right now, as Mark said in his prepared remarks, a lot of the pipe is made up of singles and doubles and I would just take it back to our ATM, which is just a wonderful tool to match fund those singles and doubles, as they come across the finish line to issue some shares under that to finance those and maybe use a little bit of a revolver.

We like where the leverage is, we like it below for it. We think we -- it helped us. So that's how I kind of think of financing is for the next couple of quarters..

Okay, thanks a lot..

We have your next question from Juan Sanabria with BMO Capital Markets. Your line is open..

Hi, good morning. Thanks for the time. Just hoping you could talk a little bit about the Watchlist. Any changes and now things are very fluid, but any color there would be appreciated.

And if you could particularly talk about noble premier, housing operators have covered tenant sub 1x, how you feel about those two in particular?.

Yeah, you bet. On the -- as far as the watchlist goes, I think the comments we've made on that in previous quarters still stands which is, that is, if an operator was on the watchlist before the pandemic, they still are. And they have largely been buoyed up by the government funding that has helped them. That is certainly true of those guys.

And there's really nothing pressing or new on that front. We stay very close to them, we got great relationships with all of our operators. And are encouraged by the liquidity that they do have in place right now and the runway that they have. In terms of premiering noble, a little bit of a broken record on them as well.

They, they've weathered the COVID storm that hit really hard at the end of last year and the beginning of this year, hit their portfolio the hardest, in terms of time -- in terms of timing. And their occupancy is still relatively strong related to where they started the pandemic at.

And we're seeing them start to claw back and start to climb facility by facility a little bit here and there to get stronger there. So still two good operators, feel really good about them. And we're fortunate that they've been where they have been during this pandemic..

Okay. And then just on the reimbursement side or -- actually, I should say just the government support, any sense of what that rural distribution could mean? You said that X amount of facilities were eligible.

Do you know how much runway that could provide you guys, or any other keep -- to help us think about what that could mean is a benefit for CareTrust?.

Yes. This is Eric. You know, we work with some consultants that keep us up to-date with what's being said and worked on from the perspective of the provider relief funds. Where we -- we've looked at our facilities, how many would qualify? It's a large percentage of that.

We still don't know details on funding, and really where they're going to be able to use those funds. It's anticipated that it'll be possibly against their budgeted revenue, which would be nice.

But we really hope that the -- that after the announcement with the -- what's remaining in the $24 billion of the CARES act that an announcement will be made after that regarding the rural funds. We stay close to that, largely because we know that a lot of our operators and a lot of our facilities will qualify for those funds.

And obviously, we believe that it will given them and even more runway to have a soft landing, and gets that occupancy back up to where it was pre-pandemic..

Thanks. So one last thing for me.

Any thoughts on the CMS comments on PDPM? And do you think there's a chance we'll see anything this October or more likely that they'll defer and gather more data to have a more fully formed view of how much above revenue neutral, it ended up being so far?.

Yes. There is certainly is a chance. But what we're hearing so far in this open comment period is that there is a lot of comments going back to CMS about how they calculated that number and whether or not they fully captured PDPMs impact on that increase. I think that there's going to be quite a bit of -- of comments for them to deal with there.

And based on their conciliatory tone -- even if they do go forward with it, it seems like the most likely implementation of recalibration would be staged overtime. But -- there's still a lot to be determined on that front, regardless of whether it's draconian or phased overtime or reduced in terms of that recalibration.

As we've done the math we think our operators are going to be just fine, particularly because the operator is most at risk in our portfolio, as it has the highest skilled names also happened to have the highest coverage..

Thank you..

We have your next question from Jordan Sadler with KeyBanc Capital Markets. Your line is open..

Thank you. And good morning out there. So, I guys. I want to follow-up on first the pipeline, maybe Mark, it sounded on one hand, that the step of teed up the 125 to 150, more weighted towards next with a mix of some seniors housing, here and there.

But when I think he talked about sort of the funnel or the flow in the market, it was sort of the other way around.

I think he talked about seniors housing, having a greater waiting, so can you maybe just clarify for us, like what we're seeing -- what you're seeing front and center and underwriting imminently is more skilled nursing heavy? Is that correct?.

So, let me let me just clarify. So, what we're seeing in terms of deal flow from the market is more senior housing. Our pipeline and what we're focused on and under LSI is more Smith heavy.

So, despite the fact that we're seeing heavier deal flow in the seniors housing side, we're still comfortable on the sniff stuff and continuing to see those opportunities, we're just not seeing the volumes on the flip side of that we that we may be expected. But we're but we're still seeing those opportunities. And that's what we're pursuing..

Okay, and then a follow-up on sort of underwriting right. So, the PDPM discussion that we were just talking about, one is relatively new news to the extent that you've been due diligence saying, assets that are under a lie.

So, how is this impacting your underwriting, or what are you doing?.

Well, I think I think there's a couple things I think we've looked at we certainly look at the Medicare rate, you've obviously got to back out to the extent you can the waiver that's really a qualifying survey to kind of figure out what the run rate is for Medicare. I think there's got to be a little bit of margin of safety on that rate.

But I think what's often -- as we look at each individual asset, oftentimes, you can look at the specific Medicare rate, and each individual operator is going to be able to capture their rate a little bit differently.

So, based on the MDS and based on the diagnoses of each individual resident, we sort of have an understanding of where the benchmark should be and then we adjust off of that. So, it's very specific to the assets and it's in lockstep with our operators to understand certain buildings are going to get a certain type of acuity.

Not all, Medicare patients are the same, you're going to have in some communities, you can have patients that come in that are extremely clean, very healthy, that come in for maybe a stroke and they don't have multiple comorbidities, while other pockets of markets can have patients that have a laundry list of diagnoses, and they're going to look very, very different under the MDS, which is basically the input information that goes into doing the Medicare patients.

So really it's getting with our operators and figuring out kind of based on the building, based on the flow that they expect to get in terms of skilled patients. And then really kind of sharp shooting and dial in on what that right Medicare number is. In terms of in terms of kind of right sizing before the step down in PPM.

Do we take a look at that instead of -- kind of try to figure out what that rate looks like the thing cut by say 3% or 5% or 7%. just to see what that does to coverage -- to stabilize coverage. There's other factors too, I mean what happens with Medicaid. And you have states that are looking at continuing to change their Medicaid rates.

You have some states that are going from fixed rate to more of a CMI based acuity. So, there's several things that go into it. But I think all things being equal, the important factor is getting shoulder-to-shoulder with the operators.

And walking through the assumptions, understanding why -- what they're using for their Medicare rate, what they're using for their Medicaid daily rate.

And then really looking at what the building's doing from an existing perspective, and making sure that we can bridge -- that making sure the operator can bridge the gap and get to where they are projected..

Okay. That's helpful. Maybe one quick for you Bill. On the ATM, your leverage, it’s 33, now it’s 37 and issued 700,000. Clearly, you didn't need the 700,000 shares in order to stay within your tolerance, right, because you're still below four to five. But I guess you're adding a little bit more capacity for yourself.

How should we think about, where you want to be sort of short to medium-term vis-à-vis four to five target, do you actually want to be under four?.

We like operating under for four..

Hey, Jordan, it’s Greg. I'll just 3tack on to that and tell you that, if you look at what we just did, we were running like 33 in February. And we just spent $150 million and didn't break for we really liked that. And it's already ratcheting back down to the 37 range. And so we'll be ready for the next $150 million deal.

Should that come along? This seems to be a very good place for us, for the investors we spoken with like it very much. And while we were not going to lower our target range of the four to five times so that we could do the $300 million, $400 million, $500 million dollar deal if it came along, and we do have the capability to do that.

We really are going to do intend to stay kind of where we are in the threes..

Okay. That's helpful. Thank you guys..

We have your next question from Daniel Bernstein with Capital One. Your line is open..

Thanks for taking the call. I guess I have a question on the CPI bonds. In those senior guidance you went from 1.2 to 2.0.

So I just want to understand a little bit better about how those CPI bumps are, I guess we set within those leases or they reset quarterly, maybe what they're linked to just want to get a better idea, the idea of that?.

Sure. Hey, Dan, it's Bill. The CPI bumps occur on the annual renewal date. So it's once a year, some of the leases have caps on those -- on the CPI charge, and a floor of zero. We moved it from 1.25% to 2% from the last from last quarters guidance, mainly because we're seeing CPI increases north of 2% right now..

All right. Okay. And then maybe a related question would be, if I was an operator, and I'm looking at inflation, I might not want a CPI based away.

So have you had any pushback from potential new tenants and deal sector that you're looking at? And people maybe want more of a fist bump and a CPI bump?.

Dan, it's Greg. No, we really haven't. Most of our operators really like CPI as opposed to fixed months, because they feel like it tracks better with their overall expenses, labor costs and everything else out there.

And it's just seems to be what you can't predict the exact number, it seems to it seems to be more predictable in terms of the economy and how their businesses fare. So we don't get a lot of pushback on CPI bumps as long as we can give them a raise that it won't go over.

As Bill said, most of them also are capped at somewhere between for the Ensign leases, which were kind of semi arms like leases. They have to two and a half. Other leases are capped at three and a half. So long as they got the cap on there and they can just go with the economy there. That's what they like, actually..

Okay. That's all I had. Appreciate the time guys..

You bet. Operator [Operator Instructions].

Okay, well looks like we're done. Thanks, everybody for being on. We hope to see at NAREIT. Take care..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect..