CareTrust REIT Inc

NYSE:CTRE

Earnings Call Analysis

CareTrust REIT's Strong Performance and Optimistic Outlook

CareTrust REIT reported a robust first half of 2024, with normalized FFO and FAD increasing by over 50% each year-over-year. Investments amounted to $765 million, yielding 9.5%, and equity issuance raised $580 million. The company updated its annual guidance, raising normalized FFO per share to $1.46-$1.48 and FAD per share to $1.50-$1.52. The skilled nursing pipeline remains promising, with significant opportunities anticipated. Management emphasized their long-term strategy and strong liquidity, marked by $495 million in cash and a net debt-to-normalized EBITDA ratio of 0.4x. As regulatory and market environments improve, CareTrust is well-positioned for continued growth.

Strong Financial Performance with Enhanced Guidance

CareTrust REIT delivered robust financial performance in the second quarter of 2024. Normalized Funds From Operations (FFO) increased by 52% year-over-year to $52.5 million, which translates to $0.36 per share. Additionally, normalized Funds Available for Distribution (FAD) increased by 49.5% to $54 million, or $0.37 per share. The company raised its full-year guidance, now expecting normalized FFO per share to range from $1.46 to $1.48, and normalized FAD per share to range from $1.50 to $1.52. This upward revision indicates management's confidence in sustained strong performance .

Record-Setting Investments and Capital Allocation

CareTrust REIT made significant investments totaling $765 million in 2024, with an average yield of 9.5%. This includes the expansion of existing relationships and the initiation of new ones, such as the $81 million acquisition of five skilled nursing facilities in the Carolinas. The company leveraged its At-the-Market (ATM) equity program, issuing $306.5 million of equity in the second quarter, resulting in $495 million of cash on hand at quarter-end. They have since utilized approximately $380 million for investments, leaving $100 million available. The capital strategy highlights an emphasis on equity funding over debt, aligning with their conservative balance sheet approach .

Focused Property and Investment Strategy

The company places a strong emphasis on selecting the right operators and properties to ensure long-term value creation and stability. The practice of matching the right operator with each investment is integral to their strategy, ensuring quality care and operational efficiency. They have also undertaken disposals and transitions of underperforming assets, with a firm stance on maintaining a high-quality portfolio .

Operational Highlights and Market Trends

Skilled nursing facilities under CareTrust REIT's management have surpassed pre-pandemic occupancy levels, reflecting a robust operational recovery. The company also noted improvements in assisted living occupancy, with year-over-year and quarter-over-quarter increases. In the broader market, heightened demand for skilled nursing acquisitions is driven by post-COVID stabilization and higher asset pricing due to a competitive market environment. Despite this, valuations remain within historical cap rates .

Liquidity and Leverage Position

CareTrust REIT maintains a strong liquidity position, with $100 million in cash and a full $600 million available under its revolver. The company achieved an all-time low net debt-to-normalized EBITDA ratio of 0.4x and a fixed charge coverage ratio of 8.2x. With a conservative leverage strategy, the company aims to keep leverage low to capitalize on growth opportunities while maintaining flexibility for substantial investments as conditions evolve .

Guidance and Outlook

Management expects total cash rental revenues for 2024 to be between $21 million and $213 million, excluding properties held for sale. Interest income is anticipated to be around $61 million, split between their loan portfolio and cash investments in money market funds. Interest expenses are projected at approximately $34 million. The company's guidance includes assumptions of no additional investments or further debt/equity issuances for the year and CPI rent escalations of 2.5%. They remain optimistic about leveraging demographic tailwinds for long-term growth .

Earnings Call Transcript 2024-Q2

[Operator]

Thanks for standby. My name is Mandeep, and I'll be your operator today. At this time, I'd like to welcome everyone to the CareTrust REIT Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Lauren Beale, SVP Controller. You may begin.

[Lauren Beale, executive]

Thank you, and welcome to CareTrust REIT's Second Quarter 2024 Earnings Call. We will make forward-looking statements today based on management's current expectations, including statements regarding future financial performance, dividends, acquisitions, investments, financing plans, business strategies and growth prospects. These forward-looking statements are subject to risks and uncertainties that could cause actual results to materially differ from our expectations.

These risks are discussed in CareTrust REIT's most recent Form 10-K and 10-Q filings with the SEC. We do not undertake a duty to update or revise these statements, except as required by law.

During the call, the company will reference non-GAAP metrics such as EBITDA, FFO and FAD, or FAD. A reconciliation of these measures to the most comparable GAAP financial measures is available in our earnings press release and Q2 2024 non-GAAP reconciliations that are available 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 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?

[David Sedgwick, executive]

Hello, everybody, and thank you for joining us. I'm very pleased with the strong first half of the year, particularly as we celebrated our 10-year anniversary this summer with some record performance. I'll speak first to our year-to-date results and outlook for the second half of the year. James will cover the investment landscape, and Bill will review the quarter.

Thus far, in 2024, we have delivered the following: record-setting investments of approximately $765 million at an average yield of 9.5% and counting; equity issuance of approximately 23.7 million shares for gross proceeds of $580 million; year-over-year market cap growth of 84% and an enterprise value of $4 [ billion ] for the first time.

What's just as remarkable as the growth this year is the genuine sense that the momentum is actually building. Funding this growth with equity has not only been more accretive than it would have been with the debt this year, but it has continued to set up the company for supercharged growth for the foreseeable future.

The first half performance is a result of moves made in recent years to our balance sheet, our team and strategic investments and relationships that taken together have all positioned us to capitalize on opportunities as [ crosswinds ] have turned into tailwinds.

In our June investor deck, I wrote about our articles of faith. First, the long-term thinking. The price we pay and the operator we choose is intended to result in long-term quality care and as a result, value creation. We do not live for the quarter.

Second, operator first. The most critical decision for any investment is matching the right operator with the right opportunity. Third, scale will come. We're not interested in growth for growth's sake. Each investment should stand on its own. And fourth, a conservative balance sheet. We believe in keeping leverage low to both protect against an uncertain macro environment and to capitalize on windows of opportunity to grow in a significant way. We may take modest short-term dilution when the pipeline justifies it.

We have relied on these principles from day 1 regardless of the direction of the wind, and we will continue to run the business in this way going forward.

Now turning to the portfolio. You will see in the supplemental lease coverage continues to show tremendous strength in security overall. Property-level EBITDAR with a 5% management fee, and EBITDARM coverage was reported at 2.17x and 2.78x, respectively.

The scale of underperforming operators remains relatively small and manageable. We have a couple of transitions underway that will result in higher revenues next year from those properties than this year. And we've decided to sell a handful of chronic underperforming assets.

The Midwest, SNF portfolio that has been held for sale remains in held-for-sale status as of today. These transitions and dispositions taken together will effectively deal with all of the properties that have underpaid this year.

With respect to occupancy, I'm pleased to report that in Q2, we finally reached and then surpassed the pre-pandemic skilled nursing occupancy levels. Skilled mix was down a little bit year-over-year, but we appear to be settling in at a new normal that is quite a bit higher than pre-pandemic skilled mix, about 330 bps higher.

We still have ways to go to get to pre-pandemic levels on the assisted living side, but we did see a 280 bps increase year-over-year and 180 bps increase quarter-over-quarter for the assisted living occupancy.

As far as the industry and regulatory front, just a couple of quick comments. 2 days ago, Medicare announced fiscal year 2025 Medicare rates would increase 4.2%.

And on behalf of CareTrust, I want to express our heartfelt gratitude to Mark Parkinson, who is retiring from the American Healthcare Association at the end of the year. He's provided terrific leadership to the association for a long time, not the least of which was during the pandemic. And we can congratulate and welcome Clif Porter as the new President and CEO of AHCA. We wish both of these important industry leaders luck, going forward.

Finally, two things. First, I'm very proud of the CareTrust team. An extraordinary year like this doesn't happen without a talented team, a strong culture and sacrifice. I'm grateful to work with the best pound-for-pound team I know.

Second, I want to recognize the relentless pursuit of quality care and performance by our operators. We are truly blessed to work with some of the very finest operators in the country and proud to report significantly higher quality measures and star ratings than the industry averages.

James will now provide you with color on the investment landscape and reloaded pipeline. James?

[James Callister, executive]

Thanks, Dave. Let me just briefly provide an update on the investment environment and on our current pipeline.

During Q2, we closed approximately $268 million of investments at an estimated stabilized yield of 9.9%. These investments included the expansion of our relationship with an existing operator, Bayshire, through the [ $61 million ] acquisition of 3 California campus facilities as well as the start of a new operator relationship with YAD Healthcare in connection with our $81 million acquisition of 5 skilled nursing facilities in the Carolinas.

During this quarter, we also closed 2 mortgage loans. The first was a $27 million loan to the buyer of 2 skilled nursing facilities in Tennessee leased to affiliates of the Ensign Group. Starting in year 4 of that loan, CareTrust has a purchase option to acquire the facilities. We also funded $90 million of a $165 million mortgage loan and a $9 million preferred equity investment in connection with the borrowers acquisition of 8 skilled nursing facilities in the Southeast.

Since quarter end, we exercised our call right on the remaining $75 million. Yesterday, we also announced that we closed on the $260 million mortgage loan and $43 million preferred equity investment in connection with the borrowers acquisition of the [ Prestige ] portfolio of 37 skilled nursing and assisted living facilities to be operated by affiliates of the PACS Group.

Now turning to the investment environment. The skilled nursing pipeline continues to reload from a steady flow of interesting and actionable opportunities coming across the desk. Competition for skilled nursing acquisitions is high as ongoing improvement in post-COVID performance has resulted in more facilities approaching or returning to stabilization.

And thus pricing on acquisition targets has increased to some degree, but has been held in check by the current capital market environment, with valuations remain within historical cap rates for skilled nursing.

As for who is selling, we continue to see small and midsized regional owner operators as well as smaller mom-and-pop operators selling their portfolios and exiting the business. The higher buyer demand, combined with operator exhaustion from the COVID years, existing loan maturities and a somewhat difficult regulatory environment seem to be the primary factors driving these owners to sell.

With respect to the regulatory environment, in some states, we are seeing stricter annual inspection surveys from regulators and corresponding penalties. In addition, change of ownership approvals in many states are taking longer. And as a result, transactions are delayed as parties wait for regulatory consent.

The combination of these factors put the buyer like us that has operational roots as well capitalized, nimble and practical in a position to provide certainty and solutions for sellers and take advantage of an environment that can facilitate accelerated growth.

With the closing of the investments announced yesterday, our total investments made year-to-date equals approximately $765 million at an average yield of 9.5%. The reloaded pipeline today sits at approximately $270 million of real estate acquisitions and consists of some singles and doubles and a couple of midsized portfolio transactions.

Not included in our [ quarter ] pipeline are a couple of larger portfolio opportunities that would not only strengthen existing tenant relationships, but would also allow us to further diversify our tenant base by commencing relationships with outstanding operators that we have been scouting for some time.

Please remember that when we quote our pipe, we only quote deals that 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 within the next 12 months.

With that, I'll turn it over to Bill.

[William Wagner, executive]

Thanks, James. For the quarter, normalized FFO increased 52% over the prior year quarter to $52.5 million, and normalized FAD increased 49.5% to $54 million. On a per share basis, normalized FFO increased $0.01 to $0.36 per share and normalized FAD also increased $0.01 to $0.37 per share.

And again, this quarter, because of our replenishing robust pipeline, we continue to take advantage of our ATM and issued $306.5 million of equity under the ATM during the second quarter, resulting in us having $495 million of cash on the balance sheet at quarter end.

Since quarter end, we have used roughly $380 million for investments, leaving us with approximately $100 million as we sit here today. In yesterday's press release, we updated and raised our guidance for this year from normalized FFO per share of $1.42 to $1.44 to a new range of $1.46 to $1.48 and for normalized FAD per share from $1.46 to $1.48 to a new range of $1.50 to $1.52.

This guidance includes all investments made to date, a diluted weighted average share count of 146.9 million shares and also relies on the following assumptions: one, no additional investments nor any further debt or equity issuances this year; two, CPI rent escalations of 2.5%. Our total cash rental revenues for the year are projected to be approximately $21 million to $213 million.

We've eliminated the reserve discussion going forward as the properties that we're making up the reserve are set to be sold and we don't have any revenue in guidance for them. Not included in this number is the amortization of below market lease intangible that will total about $2.3 million, but this will be in rental revenue number as required by GAAP.

Three, interest income of approximately $61 million. The $61 million is made up of $48 million from our loan portfolio and $13 million is from cash invested in money market funds.

Four, interest expense of approximately $34 million. In our calculations, we have assumed an interest rate of 6.9% for the term loan. Interest expense also includes roughly $2.5 million of amortization of deferred financing fees. And five, G&A expense of approximately $25 million to $27 million and includes about $5.8 million of deferred stock compensation.

Our liquidity continues to remain strong. We have approximately $100 million in cash today and our entire $600 million available under our revolver. Leverage hit an all-time low with a net debt-to-normalized EBITDA ratio of 0.4x. Our net debt-to-enterprise value was 2.6% as of quarter end, and we achieved a fixed charge coverage ratio of 8.2x.

Lastly, as long as the price of our equity relative to the current cost of long-term debt issuance remains pretty comparable, we believe that it makes much better sense to continue to fund this replenishing pipeline with equity. Our net debt-to-EBITDA range of 4 to 5x is still our range. It just may take some time and a lot of investments to get back there, which, like I said last quarter, we plan on doing.

And with that, I'll turn it back to Dave.

[David Sedgwick, executive]

Well, thank you, guys. Let me conclude the call with three things. First, our year-to-date investments equal approximately 3.5x our life-to-date average annual growth rate, and we're not finished with this year.

Second, we have a balance sheet that provides enormous flexibility and historic capacity for both the near term and midterm. And third, we are at the start of demographic tailwinds that should last for decades to come.

We hope our reports have been helpful, and thank you for your continued support. Happy to now take some questions.

[Operator]

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

[Jonathan Hughes, analyst]

It's been great to see the success over the past 10 years. I asked this on the last call, but James was not available to answer. So I'll ask it again to hopefully hear the perspective from his mouth.

But the expectations are very high for continued acquisition activity, given the leverage profile, and with that comes pressure to get deals done. And what I think I heard you say is becoming a more competitive acquisition environment. Can you talk about how do you manage to balance those expectations for continued investment activity while maintaining underwriting discipline?

[James Callister, executive]

Yes. Sure, Jonathan. Thanks for the question. I think we'll really continue what we've been doing, which is we're focusing on relationships, we're focusing on finding the right operators, and we're finding on -- focusing on developing more avenues where pipeline deals can come to us.

And so I think as we continue to expand on the relationships that we forged, as we continue lending with a purpose, as we continue to be seen as a creative, flexible transaction partner with high certainty of closing; that opportunities will continue to present themselves, both traditionally through the broker community but also organically through existing operators, joint venture partners and relationships we worked really hard to develop over the past 2 years.

[Jonathan Hughes, analyst]

That's great. And then on the pipeline that you're looking at today, what percentage of that would be from existing relationships? What would be new? I think you mentioned there were some potential new relationships. I didn't -- I wasn't clear if that was in the pipeline or like the larger deals that would not be included in the pipeline.

[James Callister, executive]

Little of both. I think what we have in the pipe today is a couple that would be new relationships for us and a couple that would be existing longer-term relationships for us. I would say pipe consists of pretty exclusively skilled nursing right now.

But it's a mix between new operators and current. And it's a mix of deal source from -- some from brokers, some from existing operators, some from relationships we've done deals within the last 12 months. A little bit of all of that.

[Jonathan Hughes, analyst]

Okay. Last one for me, maybe for Bill or Dave. But can you talk about that leverage target range of 4 to 5x? You did say that's still the target. But I think we've only been within that range a few times in the past 5 years. And of course, with lower leverage does come a better equity multiple.

But as we think about earnings power on a fully levered basis, should we really be thinking about that 4 to 5x leverage range or maybe more like 3 to 4x? Just any thoughts on that.

[David Sedgwick, executive]

Well, I think you're right. We have kept it quite a bit lower than that stated range in order to fuel this elevated growth rate that we're experiencing right now, and we'd like to keep that flexibility to take advantage of opportunities like this.

Well, we're not moving off of that 4 to 5x just because, look, if we grow in a significant way, we want to be able to have the flexibility to go up to that range again, if we need to. And you're right, as interest rates come down, it becomes really interesting to see what that accretion looks like as we're able to pull that lever a little bit more.

[Operator]

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

[Austin Wurschmidt, analyst]

As you guys continue to make what I'll call these seed investments to some extent and loans like you did early in the third quarter, I guess, what's sort of the multiplier effect or how much beyond those dollars invested would you expect to do in future real estate investments to justify moving forward with the shorter-term loan investments?

[David Sedgwick, executive]

Well, the -- it's hard to put a concrete number on it. When we started this strategy of loaning with this purpose in mind of multiplying and creating a pipeline of acquisitions from it, what I could tell you is it has -- we've received a return on that strategy and investment far quicker and larger than I would have suspected when we started a couple of years ago.

We have a few -- I mean, if you look at what we've closed this year and what's in the pipe, it's north of $300 million of acquisitions that have occurred because of some of those relationships and loans that we've made.

And so as long as we stick to that discipline and not just filling a void or putting money out to do it on a short-term basis, but there's at least a handshake deal and sometimes a contractual obligation for real estate acquisition from it; we're going to continue to be open to that.

[Austin Wurschmidt, analyst]

I appreciate the thoughts there. And then, Dave, you kind of highlighted the additional disposition you teed up this quarter. It seems like a specific situation. I guess, given the volume of investment opportunities in front of you, could we see capital recycling become a bigger piece of future funding for new investments just to enhance overall portfolio quality, credit quality and just kind of in a normal portfolio management discipline?

[David Sedgwick, executive]

Yes. I think there's -- it's fair to expect there to be a little bit of that on a routine regular basis, but nothing significant or sizable. I wouldn't expect, going forward, we certainly don't need the proceeds of that to fund growth. It's very specific to particular assets and operators. And like I said in my remarks, it's a really small, manageable piece of the portfolio. It's not going to be anything more than that as we sit here today.

[Austin Wurschmidt, analyst]

And then just from a timing perspective, the Midwest operator, certainly, that one's kind of been [ drill ] out a little bit longer than probably you had anticipated. For these assets you just added to the pool this quarter, any sense on timing of when you'd expect to transact?

[David Sedgwick, executive]

Well, you're right. Some things are taking longer than I would expect. And so I'm a little bit hesitant to predict. But I'm hopeful that we'll have this transition and disposition work done by the end of the year.

[Operator]

Our next question comes from the line of Michael Carroll with RBC Capital Markets.

[Michael Carroll, analyst]

James, can you provide some color on what is CareTrust's current underwriting standards when you're pursuing new deals? And how have these standards changed over the past 8 months? I mean, obviously, interest rates have come down, competition has picked up. I mean, so how are you looking at transactions a little bit differently today than maybe you were at the start of the year?

[James Callister, executive]

I think we look at them too awfully different. Mike, I think that we're going to still really shoot to try to get [ 1 4 ] coverage and on skilled nursing a yield that is at least in the 9s, that's what we're going to continue to shoot for.

I think, what has maybe changed, call it, in the last [ 2 ] years is that as we find opportunities that are on the path back to being stable, but are not there, I think there is an enhanced collaborative process with the tenants to really underwrite carefully what we think stabilized coverage is going to be at those facilities and how the operator is going to be able to get there and really make sure that we and the tenants are comfortable with the assumptions we're making and that we see the right metrics and indicators for getting back to [ 1 4 ] type coverage in our typical yield range.

So I think that we don't see as much stabilized still yet as maybe years in past, but I think we've gotten better at working with tenants to enhance that underwriting process of how long the [ term ] takes and when they get there.

[Michael Carroll, analyst]

Okay. And where are cap rates today? I know you said in your prepared remarks, they're still within historical ranges. There's a couple of large debt deals that you announced post-quarter end that was at [ 7 9 ] and [ 8 5 ]. I guess, what's the reason that you're willing to go below 9 for those transactions? Is it just because that there are larger-type transactions? And are you willing to go a little bit lower on the debt side? I guess, how should we think about that?

[James Callister, executive]

I think we're willing to go a little lower any time the deal is sizable and bigger and competitive. And I think also, Mike, as we do bigger deals, we want to create a sustainable rent or interest stream. And if we take an [ unyield ] for more comfort on coverage, we're going to make that trade more often than not, especially on larger deals. And I think that's kind of what you see with the loan yesterday, and the loan in June is that exact approach.

[Michael Carroll, analyst]

Okay. And I don't know if you can talk too much about this [ Prestige ] transaction. But I guess, what were the gives and takes on doing that as a mortgage versus buying some of the real estate and then also kind of the addition of the preferred with the operator? I mean how do you think about creating that type of transaction utilizing, I guess, different levers?

[James Callister, executive]

Yes. I mean I'd say, look, when we looked at it from thinking of whether it would work from an acquisition perspective, when we try to be opportunistic, we got to pick our spots, and we felt like doing it completely on our own, we were going to -- it's a tough solve, and we're going to have difficulty unlocking the value of some of the assets, including in particular, the [ 15 ] leasehold assets that are with third-party landlords.

So we like better the profile of aligning the borrower and operator who both put equity into the real estate side of the deal. We like that we've still got over $40 million of essentially, for us, real estate equity in the press we put out.

And so on that, in particular, deal, we felt like the [ loan ] made more sense and was a better structure for us. But we look at each deal individually. And our preference is always going to be to acquire. But sometimes we pick our spots and see a different alignment structure may fit what we're looking to do better. And that was the case with [ Prestige ].

[Operator]

Our next question comes from the line of Juan Sanabria with BMO Capital Markets.

[Juan Sanabria, analyst]

Just curious on the $270 million pipeline, the mix between fee simple loans, and how should we think about the blended year -- yield there, given you mentioned increased competition?

[James Callister, executive]

I mean on the loan itself, Juan, the one we announced yesterday?

[Juan Sanabria, analyst]

No. So for the pipeline of $270 million, what are the yield expectations, given higher competition levels? And then...

[James Callister, executive]

It's all skilled nursing. And I would say that the yields are still where they've been for us. I mean, it's going to be more likely than not in the 9s when we push it where we can, where coverage seems like it's going to fit for that deal. But I think what you see in the pipe right now is right in the sweet spot of where we've been, which is in the mid-9s.

[Juan Sanabria, analyst]

And the split between...

[David Sedgwick, executive]

Just to clarify, there's no loans in that $270 million pipe that we've quoted. It's just a few simple acquisitions to SNFs.

[Juan Sanabria, analyst]

Okay. And then how should we think about the remaining dispositions and repositionings that are left to be done hopefully by year-end in terms of any offsetting dilution to the sort of the current run rate?

[David Sedgwick, executive]

No. I think, in guidance, we're not expecting any income from any of those facilities that are being transitioned or sold. So anything that we were able to transition and then recycle is going to be accretive next year for us.

[Juan Sanabria, analyst]

Okay. That's it for me -- one more. Bill, can you clarify or comment if there's been any ATM activity quarter-to-date?

[William Wagner, executive]

There has not been any ATM activity quarter-to-date, subsequent to the quarter, mostly because we've been in a blackout.

[Operator]

Our next question comes from the line of John [indiscernible] with Wells Fargo.

[Unknown Analyst]

It looks like you transitioned a few assets to held-for-sale, and we know there's been some operators you've been patient with. Are you getting to a point where you're more likely to transition those out? And then, what's the impact to guide there?

[David Sedgwick, executive]

Yes, that's exactly right. We have gone from being patient to acting on those to make a change. And so -- like I said in my prepared remarks, all the transitions that are ongoing and the dispositions that we've announced effectively deal with all of the underpayments for this year. So once that's all complete, as we get new rents from the transition to assets, that will be additive to next year. And then we'll be able to recycle those other assets into new acquisitions.

[Unknown Analyst]

Got it. And then maybe jump into this morning's jobs report and some of the discussions we've heard about a [ softening ] labor environment. How has that started to flow through, if at all, to your tenants? Are you seeing any improvement in your ability to get labor in the door? And do you expect that to translate to better coverage?

[David Sedgwick, executive]

Yes, we do. We are seeing and hearing from our operators that the labor environment is normalizing. In our portfolio alone, we've seen agency expense drop 35% in the last year from -- as year-over-year. So that's a good trend. There's still some agency [ FAD ] in the portfolio. So there is some tailwind there for us as that continues to normalize.

[Operator]

Our next question comes from the line of Rich Anderson with Wedbush.

[Richard Anderson, analyst]

Question back on the disposition. If I missed it, I apologize. But do you have an idea of what type of volume we could be talking about to sort of eliminate your problem children in the portfolio?

[David Sedgwick, executive]

Volume in terms of number of assets?

[Richard Anderson, analyst]

Dollars?

[David Sedgwick, executive]

No. I mean the -- my hesitation in answering that is that when assets are on the market, we're a little reluctant to talk openly about pricing expectations and what we would expect to receive. Just we don't want to tip our hand too much to the market, but there is information in the queue about what we've done in terms of impairments, and you can kind of put some things together there.

[Richard Anderson, analyst]

Okay. In terms of the balance sheet, your nonexistent leverage ratio, is the method to really use that in this environment -- even though we're seeing interest rates come down now, but still high relative probably to recent norms. Is the method to have some room to inherit reasonably priced debt if you were to go and buy something of size and then you can kind of fold that into your balance sheet that way, is that the only kind of way you could see anytime soon getting up to your 4.5-ish type of leverage ratio?

[William Wagner, executive]

Rich, it's Bill. The only way over, call it, the next 12 months that I see us getting that -- getting the leverage back up to our stated range would be some serious investment flow. So I don't think it's realistic that in the next 12 months, we'll get up there. But having leverage so low right now does allow for us the optionality of assuming debt on larger transactions as well as utilizing the revolver when interest rates come down.

[Richard Anderson, analyst]

Do you have a sense of how much earnings you're leaving off the table because of your leverage profile? One would think that if you had more leverage, you'd have more earnings.

[William Wagner, executive]

No, I don't think so right now because of the price -- given where rates are at relative to the price of equity, I don't think we're leaving -- I don't think we're losing anything there. I think the outlook is where we'll see, as Dave said in his prepared remarks, is some supercharged growth when rates come down. And we have to tap that lever -- the debt lever to really see it.

[Richard Anderson, analyst]

Yes, high-class problem. Last question. CMS, you mentioned 4.2% for FY '25. I actually think that was revised up from their original proposal a bit. But do you think that this is the last year 2025 of this sort of elevated number as it relates to recapture of inflation and all that sort of stuff, do we start to trend back down to a more typical 2-ish percent type of growth rate in fiscal '26 and beyond? I'm just curious, your thoughts there.

[David Sedgwick, executive]

Well, I'd like to phone a friend on that one and call folks at AHCA to confirm or deny what I'm about to say. So with that disclaimer, I think that we're not wide back yet to getting -- I don't think we've outrun the inflationary effects on the math because with the Medicare and Medicaid rates, depending on the state, there's a couple of years of lag that is going into that math.

So the rate increase that we're getting for fiscal year '25 isn't really based on 2024 inflation, on the labor. It's actually further back than that. And so I think that we still might have a little bit more of an elevated rate increase profile going forward. But that's -- like I said, I could be wrong, but I think that's my take on it.

[Operator]

Our next question comes from the line of Alec Feygin with Baird.

[Alec Feygin, analyst]

First one for me is, is there a limit on how big the loan book can get? Anything in the covenants or internal to the company?

[David Sedgwick, executive]

No, I don't think we're going to bump up against any covenants anytime soon. We care about it. We look at it, but the tolerance that we have for it is really connected, like I said earlier, to the expected off-market acquisitions that it brings.

Virtually, all of the acquisitions that strategy has brought have been off-market [ deals ] that we would not have otherwise seen.

[Alec Feygin, analyst]

Yes. Makes sense. Kind of switching to the tenant watchlist, is there any difference quarter-over-quarter in operators who are on that watchlist?

[David Sedgwick, executive]

No.

[Alec Feygin, analyst]

Got it. And what drove the $25 million impairment? Is there a operator-specific or real estate-specific?

[David Sedgwick, executive]

Yes. It was classifying a number of assets as held-for-sale.

[Operator]

That concludes our Q&A session. I will now turn the call back over to Dave Sedgwick for closing remarks.

[David Sedgwick, executive]

Well, guys, I really appreciate your time and your interest. Again, I just want to thank the CareTrust team for an extraordinary year to date and really excited to see how the second half of the year shapes up and setting up for an amazing 2025. Have a great weekend, everybody.

[Operator]

This concludes today's call. You may now disconnect.