CareTrust REIT Inc

NYSE:CTRE

Earnings Call Transcript 2021-Q2

[Operator]

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

[Lauren Beale, executive]

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 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'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'll now turn the call over to Greg Stapley, CareTrust REIT's Chairman and CEO. Greg?

[Gregory Stapley, executive]

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 required some great facilities, refinanced some higher cost debt, raised a little equity. So 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. The skilled nursing and seniors housing industries continue to battle back from the downdraft in census that bottomed 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're 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 covers 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 payers 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 health care 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 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 costs with the $400 million 7-year bond issue we completed in June at a 3.875% coupon to refinance our previous 5.25% bonds. This fixed and reduced that chunk of our long-term interest expense and push those maturities out to 2028.

We held steady on leverage with net debt-to-EBITDA of 3.7x 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's 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 paring great operators with meaningful opportunities to transform individual facilities and by extension industry as a whole for the better. With that, I'll turn it over to Dave to discuss the industry in 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?

[David Sedgwick, executive]

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 or 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 wave 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 markets 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 150 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 appear 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 try to be as transparent and helpful as possible by reporting lease coverage on an EBITDAR and EBITDARM basis, both excluding CARES Act funding and including and amortizing the CARES Act funds received to date. Since last quarter's supplemental, HHS updated the utilization and reporting guidelines for the CARES Act. So this supplemental 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 immediately preceding quarter, ticking down slightly from 2.12x for the 9 months ending on 12/31/2020 to 2.07 x for the 12 months ending 3/31/21. However, both of these numbers are considerably higher than the same pre-pandemic number, which was 1.92x for the 12 months ending on 3/31/20. The relative strength comes from several of our skilled nursing operators, including enzyme, 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 sharp decrease in occupancy, coupled with elevated labor costs have 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 quarter's supplemental. We've removed 2 facilities from their coverage calculation as we are pursuing a sale of 1 and the other has been undergoing a major remodel and has not been opened or 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-win 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 at roughly $24 billion remained in the provider relief funds. On July 19, 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 fund 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 in the first quarter of 2021. Given DC'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 to mention. We'll leave the predictions to the scientists and statisticians, but we can say both, based on report this week from the American Healthcare Association and 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're hopeful that the Delta wave will be nothing like the original outbreak in 2020. With that, I'll pass the call over to Mark to talk about investments. Mark?

[Mark Lamb, executive]

Thanks, Dave, and good morning, everyone. In Q2 in sense, we continue to be aggressive on the acquisition front with 2 investments that we believe will be accretive to not only us, but our operators as well. First, at the end of April, we acquired 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 principals 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 2 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 our 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 2 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 at closing and 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 quoted over the past 12 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 our 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.

[William Wagner, executive]

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 billion, $300 million senior notes due in 2025 and the related call premium, fees and 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 rent conserve reserves nor any further debt or equity issuances this year; 2, 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; 3, interest income of approximately $2 million; 4, 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 5, we are projecting G&A of approximately $19.6 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 produce 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 3.7x today. Our net debt to enterprise value was 22.1% as of quarter end, and we achieved a fixed charge covered ratio of 8.1x. 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.

[Gregory Stapley, executive]

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

[Operator]

[Operator Instructions] Your first question is from Juan Sanabria of BMO Capital Markets.

[Juan Sanabria, analyst]

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 have a better bounce off the bottom. So just curious if it's maybe smaller facilities or labor constraints that you've kind of touched on, but any color on the lack of growth and occupancy would be helpful.

[David Sedgwick, executive]

This is Dave. What we've heard from our operators is that some local restrictions on visitation have 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 infill 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 particular state, for example, we have 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.

[Juan Sanabria, analyst]

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

[David Sedgwick, executive]

By and large, the restrictions have been lifted as the most restrictive restrictions were in place last year. But that was -- so that is, 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.

[Juan Sanabria, analyst]

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

[Gregory Stapley, executive]

Juan, this is Greg. We've always been willing 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.

[Operator]

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

[Jason Idoine, analyst]

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 then it sounds like today, it's mostly singles and doubles. So I guess, have those larger portfolios just not come to the market, maybe it's the level that you had expected? Or what are you guys seeing on the acquisition front?

[Gregory Stapley, executive]

This is Greg. I'll take that, and then Mark can fill in if I miss anything. Look, there are a couple of larger portfolios out there. but we think we see everything that comes through the marketing as this quarter demonstrated, as we 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 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 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've seen, we're 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 4 buildings, but $125 million. So that wasn't small. But right now, with our pipeline at $100 to $125 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 -- that still lingers across the industry. Mark, anything to add?

[Mark Lamb, executive]

Yes. I would just say that, Dave, 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 -- it's a little bit of a fluid situation in terms of matching assets with operators, assuming that we can get there on pricing?

[Jason Idoine, analyst]

Got it. Okay. And then in terms of the provider relief funds, so there's $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's your guys expectation there? And then what's the potential in your eyes of seniors housing getting a chunk of that?

[David Sedgwick, executive]

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 understanding that this Phase IV 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.

[Operator]

Your next question is from Jordan Sadler of KeyBanc Capital.

[Arthur Porto, analyst]

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 your 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?

[Gregory Stapley, executive]

Yes, 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 of 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, 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 and it's 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 in more deals with Ensign in the future.

[Operator]

Your next question is from Steven Valiquette of Barclays.

[Steven J. Valiquette, analyst]

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 REIT peers did note that some of the rising labor pressure and wages can be difficult to manage and state with limited or no COVID-19 reimbursement relief. So I guess I'm curious if you can speak at a high level on 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.

[David Sedgwick, executive]

Right now, the performance, either positive or distress, 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 medicated 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 at or talked that directly today, more is definitely needed. So we're anxious to see the Phase IV funding approved and distributed in the months to come.

[Steven J. Valiquette, analyst]

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 I might have been somewhat overlooked in the investment community. So I just have one question around one of the slides in there, not to have to make you tap your memory banks. So one of the slide, it was Page 19, but basically, it showed your monthly skilled mix occupancy and how that's benefited from the elimination of the 3-day hospital stay rule, show that they peaked at around 26% in December of 2020. your come back down a little bit in the first 4 or 5 moths of '21, which is to me, I think, was a little bit surprising. But -- so the questions are, what's your latest intelligence on the duration of the suspension of the 3-day hospital state requirement? And then 2, if you did have to predict how your skilled mix occupancy will progress for the rest of 2021, how would you characterize it?

[David Sedgwick, executive]

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 an 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 3-day qualifying stay waiver, as you've stated. Our understanding is that, 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.

[Operator]

Your next question is from Daniel Bernstein of Capital One.

[Daniel Bernstein, analyst]

I guess, my question on the Ensign relationship was actually asked. But in that same kind of context, Ensign on the earnings call, was saying that some of the properties are, I guess, some of the new properties they're 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 fellow government maybe an impetus for that?

[Gregory Stapley, executive]

Dan, it's Greg. The operator that Ensign replaced in those 2 Texas buildings is not exiting the business, which is exciting at those particular facilities. But they're still around in other places, it have 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 a 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're 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.

[Operator]

Okay. That was the only question I had. I appreciate it. And we have no further questions. I'll turn the call back over to management for any additional or closing remarks.

[Gregory Stapley, executive]

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

[Operator]

Yes. We have Jonathan Hughes of Raymond James.

[Jonathan Hughes, analyst]

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?

[William Wagner, executive]

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

[Jonathan Hughes, analyst]

So guide to the cadence would then be for like third quarter, maybe down a little and that reverts itself in the fourth quarter?

[William Wagner, executive]

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

[Jonathan Hughes, analyst]

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

[David Sedgwick, executive]

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 built -- there are 6 buildings with us are a small piece of their overall portfolio, but they're 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 their pandemic. We think they've bottomed and are other way back and the parent company credit is -- it gives us no cause for any concern in the short run.

[Jonathan Hughes, analyst]

Okay. And that's all skilled nursing, right? It's not senior housing?

[David Sedgwick, executive]

That's right.

[Jonathan Hughes, analyst]

Okay. And then just one more for me for maybe Mark or Greg. But 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 that 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 6 to 12 months?

[Gregory Stapley, executive]

Well, Jonathan, it's Greg. We did mention in our prepared remarks, one facility that we are -- we've now slated for sale. It will be a very, very small deal material 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.

[Jonathan Hughes, analyst]

Yes, I didn't see the one noble. I guess I was just more asking on a larger scale, but you just addressed that. So -- okay. That's all I had. I appreciate the time.

[Operator]

We have no further questions.

[Gregory Stapley, executive]

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.

[Operator]

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