CareTrust REIT Inc

NYSE:CTRE

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by. My name is Prila, and I will be your conference operator today. At this time, I would like to welcome everyone to CareTrust REIT Third Quarter 2024 Earnings Conference Call.

[Operator Instructions]

I would now like to turn the conference over to Lauren Bealel, SVP Controller. Please begin.

[Lauren Beale, executive]

Thank you, and welcome to CareTrust REIT's Third 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 success. 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 Carter's recent Form 10-K and 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 SAP or FAD. A reconciliation of these measures to the most comparable GAAP financial measures is available in our earnings press release and Q3 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]

All right. Hello, everybody, and thank you for joining us. The flywheel started to pick up speed a year ago, and it is now racing. At the end of last year, we recognized that 2024 could be a historic year for growth. and the company recalibrated the team and the balance sheet to capitalize on that opportunity. I am so proud of their relentless work to make this year extraordinary. As you may know, yesterday, we announced that we entered into a material contract to acquire a portfolio of 31 skilled nursing assets around Tennessee for a purchase price of $500 million, investing $442 million at an estimated yield of 9% expected to close by year-end.

This deal will continue to expand the influence of some of the country's very best operators who have a proven ability and commitment to caring for their employees, residents, patients and communities. James will provide additional color in a minute. We also announced yesterday that we expect to acquire $57 million of skilled nursing facilities in the Northeast next month. We don't normally announce transactions before they close, but due to the size of the Tennessee deal and the imminent timing of the Northeast deal, we decided to announce these along with earnings. So now as we round third on the year, we are equally excited for next year's potential to diversify and grow the business significantly. Thus far, in 2024, we have delivered the following: First, year-over-year market cap growth of 123%. Second, record-setting investments of approximately $917 million at an average stabilized yield of 9.4%.

Third, we announced pending acquisitions of approximately $500 million of skilled nursing facilities with a 9% stabilized expected yield to close during the last 2 months of the year. The combined year-to-date investments and announced pending deals produced projected 2024 investments of over $1.4 billion at an average stabilized yield of 9.3%. Fourth, equity issuance of approximately 41 million shares for gross proceeds of $1.1 billion; and fifth, a net debt-to-EBITDA of 0.08x.

On last quarter's call, I commented on how 2 things are equally remarkable. Not only this year's growth, but also the sense that momentum was actually building. Now you know at least partly what I was referring to. As we sit here today, our pipeline, including these 2 pending deals is $700 million, almost all of which are real estate acquisitions. A quick comment on the makeup of this year's investments. Including the pending November and December deals I referenced, we will have closed on the following: over $1.4 billion, approximately $825 million of that our real estate acquisitions and 590 of debt investments or roughly 60-40 acquisitions to loans, all at a blended estimated stabilized yield of 9.3 million percent after any rent ramps take effect.

Allow me to give you some more color on the return on investment we've achieved on the targeted loans we've made over the past few years. For a few years now, we have been executing a strategic approach to lending that includes at the very least, a handshake with the borrower, JV partner or operator that they will bring us real estate acquisition opportunities in the future. And at best, the debt investment activity also includes more than a handshake, either a loan to own or loan and own a part of the portfolio. This approach has been incredibly successful for us as our friends in the industry have made good on their word and brought to us deals, many of which are off market, that we would not have otherwise seen nor won.

We made a total of approximately $200 million of debt investments from 2022 through 2023. Looking at this year's $1.4 billion of expected deals, approximately $780 million of acquisitions are a direct result of the strategic debt relationships we've fostered over the past couple of years. Our underwriting discipline has not changed. We do not grow for growth's sake, and we are driven by our mission to expand the positive influence of operators who improve and dignify the care communities that they serve. And that's a nice segue to the portfolio.

Last week, we had our operator conference wherein we brought renowned experts in policy, staffing, reimbursement, mental health and health care AI to educate our operators on what is best-in-class and what's to come. It's one way we try to add value and show how grateful we are to them. I cannot tell you how energizing it is for our entire team to rub shoulders of leaders who are engaged in the noblest of professions day in and day out. We're proud to associate with them and proud to report that they continue to provide superior star ratings and quality ratings compared to the industry nationally and the states that they operate in. While there's no perfect way to measure quality care in skilled nursing Medicare Star ratings do provide some tea leaves.

As of September's ratings, I am pleased to see our operators achieve an average of 3 stars versus 2.8 stars in the states that they operate in. Our operators' quality measures performance is even stronger with an average of 4 stars versus 3.4 industry stars. As former operators ourselves, we have an absolute conviction that sustainable financial success can only be achieved after clinical success. 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 to increase 2.23x and 2.85x, respectively. The scale of underperforming operators remain small and manageable. We have a couple of transitions underway and a handful of assets for sale that when transitioned and/or sold will result in higher revenues next year since they have not been rent producing this year.

I'm very pleased to report that the Midwest skilled nursing portfolio with negative lease coverage that we've talked about for over a couple of years was sold in the quarter. These transitions and dispositions taken together will effectively deal with all of the properties that have underpaid this year. Finally, 3 observations. First, I'm very proud again of the CareTrust team, an extraordinary year like this doesn't happen without a talented team, a strong culture and sacrifice. Second, I want to again recognize the tireless pursuit of quality care and performance by our operators. We are truly blessed to work with some of the finest operators in the country. I'm proud to report superior lease coverage quality measures and star ratings.

Third, we are at the start of demographic tailwinds that should last for decades to come. James will now provide you with color on the investment landscape and reloaded pipeline.

[James Callister, executive]

Good morning, everyone. During the third quarter, as previously announced, we closed on approximately $441 million of new investments, largely consisting of a $260 million loan and a $43 million preferred equity investment in connection with the borrowers' acquisition of a large portfolio in the Northwest, including 37 skilled nursing and assisted living facilities to be operated by affiliates of the PACS Group. Since quarter end, we have closed on approximately $89 million of additional investments, including the acquisition of a for facility 396 licensed bed skilled nursing portfolio located in the Mid-Atlantic for approximately $75 million.

These facilities have been master leased to a new tenant relationship for CareTrust with an initial term of 15 years with 2 5-year extension options and a year 1 contractual lease yield of approximately 9.3%, inclusive of transaction costs and with annual CPI-based escalators. In addition, yesterday, we announced an updated investment pipeline of $700 million, which includes the announcement of a CareTrust affiliated joint venture, having entered into binding agreements to acquire 31 skilled nursing facilities for an aggregate purchase price of approximately $500 million, exclusive of transaction costs. CareTrust is expected to contribute approximately $442 million to the venture and in exchange will own 100% of the preferred equity ownership interest in the venture and 50% of the common ownership interest. The portfolio consists of a total of 3,290 licensed beds with 30 of facilities located in Tennessee and one in Alabama. Completion of the acquisition is subject to customary closing conditions and is expected to close in 2 phases during December 2024. A majority of the facilities will be operated by existing CareTrust tenant relationships, including affiliates of the Ensign Group, PACS Group Inc. and Linx Healthcare Group. Initial annual base rent to the venture is approximately $44.4 million.

The company's initial contractual yield on its combined preferred and common equity investments in the venture is expected to be approximately 9% after estimated transaction costs. The announcement of this transaction should provide a fantastic way to finish out what has been an extraordinary growth year for CareTrust and set the stage for continuing the momentum into 2025. Please remember that when we quote our pipe, we only quote deals that we have a reasonable level of confidence we can close on within the next 12 months. Now a quick note on the current transaction environment. As the updated pipeline indicates, skilled nursing transactions market remains active, with steel flow being consistently strong. We continue to see regional owner operators and smaller independent owners looking to sell as they seek to capitalize on improved operating conditions.

The buyer pool continues to be somewhat narrow the buyers who bring certainty of closing continue to have a distinct advantage. With respect to assisted living, there remains a good amount of distressed assets coming across our desks. With that said, we are seeing improvement in operating metrics, including occupancy, and we are seeing an increase in the number of buyers looking to potentially transact. Senior Housing assets that have an AL Medicaid waiver component are drawing stronger interest from buyers, including from middle market acquirers. So while the acquisition market remains competitive, we continue to leverage our relationships and our disciplined investment approach, to identify opportunities that offer appropriate risk-adjusted returns and that match the right operators with the right assets.

With demographic trends in our favor and an ongoing supply and demand advantage for post-acute and senior care, we are confident that the sector provides significant runway for future growth. With that, I'll turn the time over to Bill.

[William Wagner, executive]

Thanks, James. For the quarter, normalized FFO increased 66% over the prior year quarter to $60.9 million and normalized FAD increased by 60% to $61.9 million. On a per share basis, normalized FFO increased $0.03 to $0.38 per share and normalized FAD increased $0.02 to $0.39 per share. And again, this quarter, because of our replenishing robust pipeline, we continue to take advantage of our ATM and issued $500 million of equity under the ATM during the third quarter, resulting in us having $377 million of cash on the balance sheet at quarter end. Since quarter end, we have used roughly $89 million for investments and have approximately $230 million of cash on hand as we sit here today.

We will use $57 million to fund the investment that will close in November, leaving us with roughly $175 million. In yesterday's press release, we updated and raised our guidance for this year from normalized FFO per share of $1.46 to $1.48 to a new range of $1.49 to $1.50 and for normalized FAD per share from $1.50 to $1.52 to a new range of $1.53 to $1.54. This guidance includes all investments made to date, including the one that will close in November, a diluted weighted average share count of 152.6 million shares and also relies on the following assumptions: One, no additional investments other than the announced pending $57 million deal closing in November 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 $216 million to $217 million. Not included in this number is the amortization of a below-market lease intangible that will total about $2.9 million, but this will be in the rental revenue number as required by GAAP. Three, interest income of approximately $65 million. The $65 million is made up of $50 million from our loan portfolio and $15 million is from cash invested in money market funds.

Four, interest expense of approximately $30 million. Interest expense also includes roughly $2.5 million of amortization of deferred financing fees and five, G&A expense of approximately $26 million to $28 million and includes about $5.8 million of deferred stock compensation. If the announced acquisition does close in Q4, and it will trigger onetime short-term incentive compensation that will require us to accrue additional expense in Q4 that is not included in this range. Our liquidity continues to remain strong. We have approximately $230 million in cash today in our entire $600 million available under our revolver.

As announced, we are working to upsize our revolver to $1.2 billion. I believe that this amount is already committed by our lead banks as we begin the syndication process. Leverage hit an all-time low with a net debt to normalized EBITDA ratio of 0.08x. Our net debt to enterprise value was 0.4% as of quarter end, and we achieved a fixed charge coverage ratio of 9.7x. Lastly, as long as the price of our equity relative to the current cost of a long-term debt issuance remains pretty comparable. We continue to believe that it makes much better sense to continue to fund this replenishing pipeline with equity. But given the strength of our balance sheet, we love having all options on the table. And with that, I will turn it back to Dave.

[David Sedgwick, executive]

All right. Thank you, guys. Let me conclude the call with 4 things. First, our projected total 2024 investments of $1.4 billion. equals over 6 years of growth compared to our life-to-date average annual growth rate. Second, we have a balance sheet that provides enormous flexibility and historic capacity for both the near term and midterm. Third, looking at next year, a full year impact of this year's investments should produce meaningful FFO share per share growth without any additional investments. And fourth, if you look at consensus growth projections over 3 years from 2023 through 2026, we have the lowest multiple amongst health care REITs today.

We hope the report has been helpful to you, and thanks for your continued support. Happy to take some questions.

[Operator]

[Operator Instructions]

Your first question comes from the line of Jonathan Hughes with Raymond James.

[Jonathan Hughes, analyst]

Great to see the recent investment activity in the pipeline. I was hoping you could talk about the trade-off between investment volume and deal structure. Many transactions this year have come in preferreds or JV or a multiyear stabilization period, which is a little more complex than historical investment activity. So are those more complex structures necessary to get these transactions to the finish line and if you were to have on the more simple deal structuring, would that activity have been lower?

[David Sedgwick, executive]

Great question. And I think the answer is clearly yes. If we would certainly always prefer a vanilla triple net deal with no strings attached and no partners attached. However, you look at these deals that have had the added complexity, they have largely come to us only through a relationship. And most of it has been off-market completely.

So folks are out there tying up deals and the friends of ours who do that know that they've got a great partner in us to help them transact. And because for the last couple of years, we've made it pretty clear that there's got to be true long-term real estate economics for us. That conversation is becoming much more efficient and productive than, call it, a couple of years ago.

[Jonathan Hughes, analyst]

And then just sticking with the pipeline, I think there's $200 million outside of the pending transaction. And when I look at those, I think the implied yields are double digits, pushing maybe nearly 11%. Maybe what's the mix of that, call it, $200 million or so between kind of the own and the loan or the loan to own investments?

[James Callister, executive]

Hey Jon, this is James. The vast majority of it is definitely owned. Yield push us a little higher based on some structuring stuff with the deals, but it's nearly all real estate acquisitions. -- very little loan activity is in the remainder of the pipeline after you take out the Tennessee deal and the $57 million Northeast deal announced.

[Jonathan Hughes, analyst]

That's helpful. And then just one more for me. There was a few of yours recently talked about moving into the [ RIDEA ] or seniors housing operating structure. And Jay did talk about more seniors housing opportunities in the transaction market. Obviously, you're, call it, 90% field nursing and -- and Dave, I know that's your background and that's where the core focus of the company is, but curious as to your views or interest in RIDEA opportunities?

[David Sedgwick, executive]

Yes. So I'd say for about the last all 18, 24 months as we've been getting that question, the answer really hasn't changed, and it's this. It's a compelling, interesting opportunity for the right opportunity. We're not going to do it just to do it. But if we can find sort of that Goldilocks opportunity where it's a sufficient size that matters, and it comes with some great people that are experienced in the RIDEA format, and it comes with exceptional operators. If we can -- if you know that, give us a call, but that's kind of what we would be open to doing. So I would say, yes, it's very interesting. We're open to it. We certainly have plenty on our plate at the traditional triple-net business, though.

[Operator]

Your next question comes from the line of John Kalichewski with Wells Fargo.

[Unknown Analyst]

So -- just kind of going to the portfolio deal here. I don't know if you've announced this before ever given this information, but maybe you could just talk about the coverage of these assets in particular and then also kind of dive into the Link relationship. I know that on your coverage sheet. They don't have anything because a lot of their stuff is prestabilization but maybe what the assets of this portfolio look like?

[James Callister, executive]

Yes. So John, this is James. The assets in the portfolio vary a bit by tenant. But overall, I would say they covered just shy of one going in, but each of the tenants has a stabilized pro forma that probably puts it like a 1.5. And so we're excited about that, and we're excited about the tenant mix. Linx is performing fairly well based on the transaction we did with them a couple of years ago. We kind of expect that upward trend to continue with them. They've been doing a great job.

And I think that there depth of looking at this transaction and these facilities was really impressive to us. They dug in all the way, and we feel really confident about their ability to really exercise on these facilities be a great part of the overall portfolio with the other tenants.

[Unknown Analyst]

And James, if I could follow up on 1 from your opening remarks, just about the acquisition environment, the transaction environment. How do we think about competition eventually reentering the market? It sounds like, obviously, given the numbers you're able to put up that you found a vertical that you could really compete on your own in. But at what point do you worry that this opportunity set gets competed away or private capital comes back? Or do you feel like you've kind of developed a boat here given your cost of capital and that you're seeing capital not really likely to reenter the SNF space anytime soon?

[James Callister, executive]

It's interesting because while the buyer pool is somewhat narrowed, John, it's still incredibly competitive. It's very active with private money and other buying for the same deals, right? And so I don't know what -- how much of an impact others reentering may really have, it really is very competitive already. There are a lot of buyers out there whose appetite at times seems insatiable. And so I don't know, new buyers coming in is really going to change that much at all for us.

[Operator]

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

[Austin Wurschmidt, analyst]

Great. And I want to just go back to the portfolio deal. And I was hoping, Dave, maybe you could just provide some additional detail on the nature of the structure for the joint venture and the kind of preferred common interest and curious if there's any ability for you or right of first refusal for you to take down the remaining common interest over time?

[David Sedgwick, executive]

Yes, I'll let James talk to that.

[James Callister, executive]

Yes, so the breakout really is the preferred equity is -- the vast majority of what we would be putting in be close to $425 million of it. And that's not a preferred equity that comes back or has a term on it or anything like that. So it stays out there forever. And we do a couple of periods during the investment horizon. We do have a call right and the JV partner has a put right. So we do look forward to having the opportunity to acquire the entire venture ourselves down the road and still have it be accretive to us, which is kind of why we structured the call the way we did.

[Austin Wurschmidt, analyst]

Can you give us a sense how far out that call right is?

[James Callister, executive]

Between years 1 and 3. No kidding. Between about 4% and 7%, call it.

[Austin Wurschmidt, analyst]

That's helpful. And how long did it really take for you to get the deal to this point? I mean was this 1 of the earlier large portfolio transactions that was presented to you from the time I want to say, 12 to 15 months ago that you started kind of discussing the investment pipeline plus large potential portfolio deals? Just any color there would be helpful.

[James Callister, executive]

No. I mean this came around, call it, April to June is when it kind of first started percolating Austin.

[Austin Wurschmidt, analyst]

And has there been any strategic focus to expand the geographic footprint? Or are the deals would you say taking you to these new markets? Just curious kind of the chicken and the egg there.

[James Callister, executive]

Really, it's the deal that takes us to the new market. And we have areas we like and we like to grow in shore, but we really take it on a deal by deal, it has to be the right deal first before we really focus on exactly where it might be in terms of targeted growth. And this one fit what we were looking for as a deal first.

[Operator]

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

[Michael Carroll, analyst]

James, I wanted to follow up on an earlier question where you talked about coverage ratios with this portfolio transaction. I mean I believe you said that the going-in coverage ratio was 1, going up to [ 1.5 ] first, is that an EBITDAR coverage ratio? And second, what's driving that improvement? Is it something that these new operators are doing differently to drive that type of uptick? Or I guess, what's actually driving that better pro forma expectation?

[James Callister, executive]

Yes, it is an EBITDAR coverage, Michael. I think it's -- each of the sub portfolios is a little different, but I would say it's -- there's some up room in occupancy. The Medicaid rate has gotten better in Tennessee and it's these operators' abilities to really operate efficiently and reduce costs, in particular, with some of the ancillaries and whatnot. So that's kind of where the growth is going to be coming from the operators.

[Michael Carroll, analyst]

Was there a big Medicaid rate increase so that I guess the trailing numbers doesn't include that Medicaid rate increase, but now it does. Is that what you said?

[James Callister, executive]

The training does include part of it, yes.

[Michael Carroll, analyst]

Okay. And then are these new leases that you have with Ensign packs or in [indiscernible] Or are they going to be included in your existing master leases?

[James Callister, executive]

Because the real estate will be owned by the venture, Mike got to be new master leases, but they are on consistent terms with what we have.

[Michael Carroll, analyst]

And then the type of transaction gains that you're looking at, I mean, are there more stabilized deals just given the improvement that we've seen in the SNF space -- and what type of coverage ratios are you comfortable with on the stabilized deals that you're targeting, like all the stuff that you acquired. I mean, it's similar cap rates that are coming in are lease rates. Are we seeing like the 1:4, 1:5 coverage ratios on most of these transactions?

[James Callister, executive]

I mean, stabilized, yes. I think historically, you're still seeing a really wide range based on a lot of things in terms of where that portfolio or operator is in terms of recovery also the geography that they're in, right? I mean there's a huge correlation between per bed pricing and the Medicaid rate in that state. So it really depends on the portfolio, but stabilized, we're generally still underwriting to 1:4, 1:5, and the lease yields as you get into higher bigger-sized portfolio deals, you're going to make a trade a little bit for a little lower yield for a little higher coverage, and that's a trade we'll do a lot. If it works for us, you get a little higher yield on smaller deals still, but that's kind of what we're seeing.

[Operator]

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

[Juan Sanabria, analyst]

This is Robin Hall I'm sitting up Juan. Just curious on the Tennessee acquisition. Could you maybe just elaborate a little bit on the brake on the deal. This usually take 4 to 5 months to take down a deal of this size. I'm just curious -- why were you needed given that Ensign has its own sort of captive REIT and who was the seller?

[David Sedgwick, executive]

Some of those questions, we've really answered as much as we can at this stage. So -- but in terms of the deal itself, yes, it's one that we tied up and brought to these different operators, not vice versa. So that's why it made sense for Ensign to do it with us as opposed to by themselves.

[Juan Sanabria, analyst]

Got it. And is the deal excluded from guidance because it closes to later in the year? Or what kind of impact can we assume by year end?

[David Sedgwick, executive]

That's a great question. It's not included in the guidance that was provided so far. But yes, I mean if you just put in the type of accretion that is likely from that looking at next year, going to -- we'll wake up on January 1 into double-digit FFO per share growth with this deal and the rest of what we've done this year. Of course, real guidance for 2025 will come in our next earnings call.

[Juan Sanabria, analyst]

Are there any other portfolios out there where you -- we feel like you might have an inside chance to land the deal of this size?

[David Sedgwick, executive]

Yes. When we quote our pipe, we've sort of made a point this year to give the number that we feel is very conservative, very doable, at least at an LOI stage, somewhere between LOIs tied up with the purchase agreement, and it has about 12 months for us to execute on. But we've also made a point to say that, that number, because it's fairly conservative, does not include everything that we're looking at. And that's certainly true today. With that $700 million pipeline number that we gave, that does not include some larger portfolio deals that we continue to evaluate.

[Juan Sanabria, analyst]

Okay. And a disposition, what was the yield on them? We're collecting any rents there. And is there any expectation for rent collection on the remaining 8 assets held for sale?

[David Sedgwick, executive]

I'm sorry, could you repeat the question?

[Juan Sanabria, analyst]

Sure.Yes. I was curious on the dispositions in the quarter. Were you collecting any rents there and is there any rent expectation on the remaining 8?

[David Sedgwick, executive]

The answer is no and no.

[Operator]

Your next question comes from the line of Wes Golladay with Baird.

[Wesley Golladay, analyst]

You've essentially doubled the size of the company this year, close to it. Curious how you're thinking about staffing for next year?

[David Sedgwick, executive]

I think this time last year, like I alluded to in my prepared remarks, we -- we were looking forward to what we thought could be a historic year and made some improvements. I think I used the word recalibrated the team a bit, which included adding some people. we are still a very lean group. And I think as we sit here today, looking at next year, we have a similar outlook for 2025, 2026 and beyond. And so our approach to that is to get ahead of it so that we can execute as flawlessly as possible. So we could certainly be adding incrementally to the team as we head into next year.

[Wesley Golladay, analyst]

And then just one quick follow-up. I think Bill made a comment if the portfolio closed this year, there might be a onetimer in G&A. Do you have an approximate estimate of that?

[William Wagner, executive]

No, I don't have an approximate estimate of it just yet.

[Operator]

[Operator Instructions]

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

[Richard Anderson, analyst]

So on the portfolio, the $500 million, what's the mechanism to get these in the hands of Ensign packs and links? Is that a -- happened simultaneously with the close? Or is there a period of sort of process that is going to kind of create some lag effect into 2025 in terms of getting to that stabilized coverage?

[James Callister, executive]

There will be a period of time where they'll need to get in and ramp up and get to the stabilized coverage. I mean, it's not a going to the historical coverage they're looking at. But I mean, it will take some time for them to put into place the levers they want to pull to get the coverage to their projected stabilization levels. But -- so it will take some time, yes.

[Richard Anderson, analyst]

You can't comment on the current operator?

[Jonathan Hughes, analyst]

I mean in terms of who it is?

[Richard Anderson, analyst]

Yes.

[Unknown Executive]

I think we probably can. I think they've released them and I think it's American Healthcare Partners.

[Richard Anderson, analyst]

Excuse me, I didn't -- I missed that. I apologize.

[Unknown Executive]

American Partners, yes.

[Richard Anderson, analyst]

Okay. bigger picture, you guys have been growing impressively this year. Sometimes growing at that pace, we've seen it happen -- inbound problems occur. And ultimately, we've got some issues to resolve in the aftermath. I hate to be a cynic here, but how do you manage those types of risks. You know your own portfolio, but you don't necessarily know what you're buying as well. What gives you the confidence that you're not going to have some of everything that you bought, this $1.4 billion is going to require some attention in the aftermath? I wonder if you could just comment on that process.

[David Sedgwick, executive]

Yes, I'd say that what gives us confidence is that our underwriting discipline has not changed. From day one, we have always said and lived by the mantra that we do not grow for growth's sake. And we have taken advantage of a really special window of opportunity that we're in right now. But we haven't done it in a way that, in any respect, deviates from our culture or our operating discipline. And so when you -- in this business, when your underwriting decision starts and ends with who is that operator? And is this the right match for this deal, you're able to take advantage of an opportunity like you're seeing us do right now.

[Richard Anderson, analyst]

Let me ask it this way. We've had outsized growth in Medicare reimbursement and Medicaid in many of the states -- perhaps a recapture of it perhaps a recapture of inflation over the past several quarters and years. What would you say to the fact that maybe the thrill is gone here in skilled nursing that we're going to start moving back to a more normal pace of reimbursement. And then you start saying, okay, well, what's the escalator? What's the reimbursement rate? And what does that do to coverage over the next few years if we get back to more like a percentage type of number on both the Medicare and Medicaid front on a go-forward basis. Maybe you could comment on where you think we are in that part of the skilled nursing cycle today?

[David Sedgwick, executive]

Yes. Thank you. I'd say that what the benefit that we have, particularly here at CareTrust, is that we've been in the skilled nursing business for over 25 years. So we've seen ups and downs. And right now, we're in a situation where I would call the operating environment very stable, very steady. And if we can be in a steady-state environment with Medicare and Medicaid, where we're back to kind of historic expectations for moderate cost of living type adjustments year in and year out, and we go to sort of that pre-pandemic environment. We would be thrilled, and we are thrilled with it.

The excitement over here has not started waning at all because the difference is we're going back to a steady-state environment. But the difference between this steady-state environment and the steady-state environment that we've been used to, excluding COVID for the last 25 years, is that now we're on the very beginning of a demographic wave that is inevitable. So you've got, call it, 2% increases on Medicare and Medicaid going forward. But you're in an inevitable occupancy increase situation because these demographics are what they are. So as you go into next year, the year after that, 5 years out, 10 years out, we're really super excited about both skilled nursing and seniors housing.

[Richard Anderson, analyst]

What is your optimal rent escalator using that mentality in your history? Is it 2%? Is that the normal? Or is it something higher than that just so you don't lose credit over time.

[David Sedgwick, executive]

Yes. So we've always -- almost all of our leases are done in the way that we think is optimal and that's CPI-based. So they've got a ceiling, relatively low ceiling for 0, and that hedges against those escalators out running what those increases are for Medicare and Medicaid.

[Operator]

And there are no further questions at this time. I would like to turn it back to Dave Sedgwick for closing remarks.

[David Sedgwick, executive]

Well, we're just really excited and grateful for your support and interest, and I hope you have a great rest of the day. Thank you.

[Operator]

Thank you. And this concludes today's conference call. Thank you all for participating. You may now disconnect.