CareTrust REIT, Inc. Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the CareTrust REIT Third Quarter 2020 Earnings Call. [Operator Instructions]. I would now like to turn the call over to Lauren Beale.

Thank you, and welcome to CareTrust REIT's Third Quarter 2020 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 statement 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 F-A-D or FAD and normalized EBITDA, FFO and FAD. When viewed together with GAAP results, the company believes these measures can provide a more complete understanding of its business but cautions that they should not be relied upon to the exclusion of GAAP reports. CareTrust yesterday 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. Management on the call this morning include Bill Wagner, Chief Financial Officer; Dave Sedgwick, Chief Operating Officer; Mark Lamb, Chief Investment Officer; and Eric Gillis, Vice President of Portfolio Management and Investments. I will now turn the call over to Greg Stapley, CareTrust REIT's Chairman and CEO.

Thanks, Lauren, and good morning everyone. Q3 ran pretty much according to script. Solid rent collections, improved testing capabilities, declining mortality rates and improving skilled mix helped offset continued weakness in census. Anecdotally, day-to-day, the operations seem much more stable than they were initially. We believe that seniors housing and skilled nursing industries are far more prepared to handle the third wave than they were 6 months ago. Engaging their near-term prospects, we have dug into the operational analysis of our portfolio at a more granular level than ever to understand and project how our tenants are likely to fare in the coming months under a variety of possible scenarios. We are pleased to be reporting, and we provided you some new data points to help you understand this in our supplemental yesterday that the HHS provider relief funds appear to be providing our skilled nursing operators with enough runway to continue operating comfortably for the next few quarters while vaccines through therapeutics and other mitigating measures roll out. We have expanded and enhanced our lease coverage reporting to show you exactly how these operators performed in Q2, which was the first full quarter of pandemic impact, both with and without provider relief funds, and we continue to track both metrics on a month-by-month basis. There are many ways to calculate the impact of the relief funds on financial performance and operator health, and different operators are doing it very differently. However, our methodology for estimating the amount of relief funds in our coverage number is very conservative. We spread all receipts to date ratably over the 15-month period from last April to next June 30. We used that period because June 30, 2021 is when providers hit the use-it-or-lose-it point under current HHS regulations. Those regulations, incidentally, have been pretty fluid to date. A number of the deadlines announced by the government in connection with stimulus programs have been pushed out sometimes repeatedly. At present, with over $30 billion in Cares Act funding still unallocated, we expect, but we are not projecting or counting on, some additional relief funding, as well as possibly some additional time to use the funds as the pandemic plays out, but we will stick with our conservative measurement methodology until the announced ground rules change. So bottom line, we see several more quarters of fairly predictable and manageable operating performance, especially if the promised vaccines are effective and rolled out quickly. And we also see a path to a soft landing for most operators if we enter an extended recovery. We will continue to advocate for our health care providers as the pandemic continues to unfold, and we intend to continue providing you with as much meaningful data and transparency about them as we can. As for CareTrust, I'm pleased to report that we remain in great shape. From April through October, we collected over 98% of rents, and with the exception of one small seniors housing tenant, November rent collections are on track and continuing to come in as expected. With nothing drawn on our revolver and $25 million in cash on hand, we have the lowest leverage in company history today at less than 3x net debt-to-EBITDA at the moment. Interest costs on our floating rate debt are at historic lows, and we have no debt maturities on the horizon before 2024. We were also able to post modest external growth in the quarter despite the pandemic and the challenges that it imposes for underwriting, and we've grown our pipeline despite the disruption in M&A activity in our space since April. Finally, we're raising and narrowing guidance for the year from our previous normalized FFO per share of $1.32 to $1.34, a normalized FAD per share of $1.38 to $1.40 to our now projected normalized FFO per share of $1.36 to $1.37 and normalized FAD per share of $1.42 to $1.43. Looking forward, we feel good about our prospects for both collections and external growth over the next three quarters, which is about as good as our crystal ball ever gets, and we see great potential for a successful 2021. First, I'll turn it over to Dave for some more color on what's happening out there, then Mark will jump in with acquisitions and Bill will finish off with the financials. Dave?

Thanks, Greg. Good morning, everyone. I ended last quarter's call with some milestones we would be tracking to measure progress towards turning the corner on COVID. So let me start there with my comments today. First, clinical capability. Both testing and treatments have improved dramatically since the beginning of the pandemic. Furthermore, most operators have now adapted to the COVID environment and largely put the initial disorientation and distress of the pandemic behind them. The second milestone we monitor closely is government funding. After four rounds of announced funding, skilled nursing operators are in fairly stable shape and seniors housing operators have recently been given another chance at applying for funds. The third milestone we're watching is hospital volumes. Both through the emergency department and elective procedures are returning to pre-pandemic levels. Due to the fluid nature of the virus, recovery of hospital volumes has been limited and idiosyncratic so far. We expect hospital volume to ebb and flow in various markets depending on the continuation of future waves of infection. Finally, the milestone, of course, is the vaccine. We are encouraged by the aggressive efforts by industry and the FDA to bring an effective vaccine to market in record time. We have seen the prioritization of nursing homes and seniors housing settings in those discussions. It is truly good to see some genuine progress on several fronts. Next, let me turn to occupancy. I'm pleased to report that from March through October, seniors housing occupancy in our portfolio has held steady compared to skilled nursing and the seniors housing sector at large. Overall, we did see a minor 100 basis points drop in seniors housing occupancy over the last few months compared to June. Individual facilities have declined while others have actually gained occupancy this year. It's been impressive to see a couple of our seniors housing operators actually perform better during the pandemic than before. For skilled nursing, not including Ensign, our overall occupancy has dropped 710 basis points or roughly 9% from March through October 31, but the higher-margin skilled occupancy has increased 480 basis points or almost 31% over the same period. The additional skilled revenue provides a meaningful partial offset to the overall occupancy loss and increased expenses associated with COVID. Now I'd like to talk about the government relief funding and our reported lease coverage. We are grateful and applaud the federal and state governments for providing the level of support that they've given to the sector thus far. Some operators have desperately needed the funds to bridge until their fundamentals recover. Other operators have benefited from the security these funds provide in a very uncertain time, and a couple of our operators have actually returned the funds altogether. The question on everyone's mind is whether the HHS funds provide a sufficiently long bridge for operators to manage through until pre-COVID operating conditions return. In other words, where is the risk in the portfolio? Traditionally, trailing twelve-month lease coverage has been the primary indicator to assess risk of master lease rents. Last year, we increased visibility by disclosing EBITDAR and EBITDARM lease coverage by operator for our top 10 tenants who account for roughly 80% of our revenue. Because of COVID and the HHS relief funds, reporting a meaningful coverage number for you became a real challenge this time. This challenge is magnified by the fact that there is no uniform methodology for operators to account for their provider relief funds, resulting in some applying large amounts right away and others taking a wait-and-see approach. Hence, simply reporting coverage based on the financials as reported by our operators would be confusing at best. Therefore, we are reporting coverage this quarter by looking at two time periods: the first three months of COVID and also at the trailing twelve. We are reporting those two periods in two different ways: first, by stripping out HHS funds; and second, what we believe is most important, which is indicative of the operator's ability to navigate the pandemic. We show coverage, including HHS funds amortized through June of next year. Since as of now, they have until June of next year to use those funds. We are pleased to report that through the second quarter, overall portfolio EBITDAR lease coverage on a trailing twelve-month basis, excluding all HHS funds is 1.94x. Ensign certainly raises that average. Without Ensign, that portfolio coverage without HHS funds is still a very strong 1.28x. For just Q2, the first quarter, which is likely the worst quarter of COVID, EBITDAR coverage without HHS funds was 2.09x, and without Ensign, it was 1.30x. Finally, we continue to be grateful and proud of our association with operators who are adapting, managing, and in some cases improving during these extraordinary circumstances. As I mentioned last quarter, as we weigh the current challenges along with the support provided to date, we continue to see a path forward for our operators to care for their residents and patients, keep their caregivers fully employed, and pay their rent as they fulfill their role as a critical part of the solution to the crisis. With that, I'll pass the call over to Mark to talk about investments. Mark?

Thanks, Dave, and hello, everyone. On the investment front, we got back on the Board in Q3 with a great tuck-in investment with our tenant Eduro Healthcare. The two-building portfolio located in Helena, Montana had very little exposure to COVID. Thus, the financials did not have a lot of noise which made the valuation pretty straightforward. We paid $16.6 million for the two buildings, which moved Eduro up from our seventh to fifth largest tenant, as we added $1.5 million in rent to our master lease with them. Year-to-date, our investment activity has produced $42.5 million in new investments. We continue to see a steady flow of opportunities coming across our desks, although not close to the pre-pandemic volume we experienced at the beginning of the year; opportunities range from broken and nonstrategic to stable, performing buildings as well as portfolios. We continue to see smaller operators looking to exit the skilled nursing facility space for good and expect that trend to continue over the next 12 to 24 months. We're cautiously optimistic about some larger opportunities that we believe will come to market over the next several quarters and expect 2021 to be a very active year in terms of acquisitions. In the meantime, we continue to pursue opportunities that we feel will match our existing operator bench and some operators with whom we would love to build a relationship that are currently in our operator pipeline. Turning to our pipeline, our usual deal flow typically lies in the $100 million to $125 million range as a result of our singles and doubles approach to acquisitions. We are happy to report that we currently sit in the $150 million to $175 million range for deals that we feel very good about. The pipeline consists of a few small portfolios as well as a few singles and doubles composed of both skilled nursing facilities and senior housing. The acquisitions in the pipeline not only allow us to further strengthen our existing tenant relationships but, as we discussed on the last call, also allow us to begin relationships with groups that we believe will enhance our ability to continue to grow our portfolio, both in our existing footprint and in new markets. Please remember that when we quote our pipeline, we only discuss deals we are actively pursuing under our current underwriting standards. And then only if we have a reasonable level of confidence that we can secure and close them in the relatively near term. Now I'll turn it over to Bill to discuss the financials.

Thanks, Mark. For the quarter, normalized FFO was $32.5 million or $0.34 per share, and normalized FAD was $33.9 million or $0.36 per share. At quarter-end, our payout ratio remains at or among the lowest of our peers at approximately 74% on normalized FFO and 69% on normalized FAD. Leverage was at an all-time low with a net debt to normalized EBITDA ratio of 3.1x and net debt to enterprise value of 22%. During the first quarter, we implemented a new $500 million ATM and $150 million stock buyback plan; neither has been utilized to date. Our liquidity remains extremely strong with more than $25 million of cash on hand today. We also have $600 million of availability under our revolver, and we produced almost $9 million of cash per quarter, even after this year's increase in our dividend. Furthermore, with our recent sale of our remaining independent living facility, our net debt-to-EBITDA drops below 3x. Cash collections for contractual cash rent in October were 98.7%, and we expect to end November collections at around 98% as well. Moving on to guidance. Despite the pandemic, we are revising upward our previously issued guidance for 2020, which called for normalized FFO per share of $1.32 to $1.34 and normalized FAD per share of $1.38 to $1.40 based on 95.6 million shares. We now project normalized FFO per share of $1.36 to $1.37 and normalized FAD per share of $1.42 to $1.43 based on 95.4 million shares. With only a few months remaining in the year, let me update you on some of the assumptions that were used in our upwardly raised guidance. Rental income is projected at approximately $170 million for the year, which includes only $80,000 of straight-line rent. Interest income is projected to be $2.3 million. Interest expense is projected to be approximately $24 million and assumes a LIBOR rate of 30 bps. Interest expense also includes roughly $2 million of amortization of deferred financing fees. G&A is projected to be between $15.5 million and $16 million and includes roughly $3.7 million of amortization of stock compensation. Guidance for 2021 will be provided in our year-end press release. And with that, I will turn it back to Greg.

Thanks, Bill. We hope this discussion has been helpful to you. We thank you again for your continued interest in supporting CareTrust. With that, we'll be happy to answer questions. Kevin, can you instruct them on questions?

[Operator Instructions]. Our first question comes from Jordan Sadler with KeyBanc Capital Markets.

So first question just really on the pipeline. It seems that there may have been some developments overnight because it seems like the pipeline may have picked up even relative to the press release last night from $125 million to $150 million to $150 million to $175 million, I thought I heard Mark. So I'm interested in hearing sort of what the pipeline is comprised of in mostly skilled nursing facilities and what pricing are looking like? And then I'm also interested to hear a little bit more about some of the larger opportunities you mentioned that could come to market. And maybe if you could kind of give us some guideposts for what larger means?

Yes, Jordan, it's Mark. So I'd say the existing pipeline is made up mostly of skilled nursing facilities. We're looking at some campus opportunities that do have a senior housing component, but no standalone seniors housing at this time. Regarding your question on future opportunities, just in discussions with the investment advisor community over the last couple of weeks, we understand that larger deals are going to come to market, somewhere in the range of $50 million to $150 million. Those are likely auction processes for quality assets, which is what we're hearing is the composition of the portfolio. We are also cautiously optimistic about what is coming. As COVID has played out, opportunities have come and gone, with portfolios being held until people feel like there may be light at the end of the tunnel. In a few particular cases, portfolios we expect to see over the next couple of quarters have been delayed until parties can better assess their financials and hopefully we will be able to underwrite a non-COVID EBITDAR run rate, assuming that something is figured out early to mid-next year.

So just expanding on that a little bit. Obviously, there's been some deterioration in census, broadly speaking, across skilled nursing facilities. And so when you're underwriting one, I assume you're looking at opportunities that incorporate market level deterioration. I'm just wondering how you think about that and sort of addressing that lost census when you're underwriting. Then I have just a follow-up; it would just be how this is affecting coverage underwriting?

To the first question, I think it's obviously important to look at pre-COVID numbers, certainly understand the level of skill in place because you can have a drop in census. You can have a spike in skilled mix. But is the spike solely driven by skilling in place, or is there an actual uptick in more skilled patients coming in? It’s probably going to be a combination of both, likely leaning towards skilling in place. Therefore, in our underwriting, we attempt to structure it in the documents to ensure that there's a safety net, accounting for downside risk in other ways. So we are not necessarily solving all problems solely through our underwriting. We need to also ensure that from a transactional perspective we’ve safeguarded ourselves against possible future issues depending on the duration of the pandemic. From an underwriting perspective, every deal is a bit different. Each opportunity in our pipeline significantly depends on the operator that's exiting. Thus, the first assessment is consistently based on current portfolio performance, but also future changes in terms of cost structure, insurance, and potential revenue side upticks while capturing rate.

Our next question comes from Michael Carroll with RBC.

Mark, I want to continue that line of questioning a little bit. You mentioned earlier that some smaller operators are looking to exit the business. Has CareTrust been able to buy properties and retenant them? Is that something that you are still actively pursuing right now in today's environment or is it more of the bread and butter sale-leaseback type transactions given the uncertainty?

I would say, no, we are still actively looking for opportunities with those that are exiting the business, where we can bring in our existing operators into new acquisitions. There continue to be opportunities once you strip out the HHS funding; operators remain confident about their performance capabilities. For instance, in the transaction we completed in the quarter, it involved an operator who wanted to exit. Our operator at Eduro, felt very good about taking over and managing it to enhance performance despite the challenges presented by COVID. Thus, that continues to be our strategy, and we will look for acquisition opportunities with our existing tenant base.

Now, does that mean that those deals take longer today, just given the uncertainty and perhaps the difficulty of transitioning operations due to the pandemic? Or should we view it as needing to be more careful about the process while still being possible?

Mike, it's Greg. Your questions and Jordan's both acknowledge the truth that underwriting under the current conditions has become considerably more complicated, which complicates providing a simple answer. Every deal is so unique, as Mark said. Then you have this unprecedented situation, which you can’t quite predict in terms of normalization. We are attempting to take these variables into account and getting very granular with our analysis of target acquisitions just as we have with the lease coverage numbers provided on our existing portfolio today. We are trying to understand the true situation behind the scenes, and I believe our seasoned operators are more beneficial to us than ever before. Thus, we continue to explore such deals. We are committed to ongoing growth. We have excellent operators in the pipeline that we hope to incorporate, plus reputable operators in our portfolio we strive to expand. While it is more complex, we won’t allow the pandemic to hinder our progress. You asked about whether transitions take more time. In actuality, operational transfers are not more complex. However, related documentation does take more time due to the current conditions. The real laborious efforts occur in underwriting and assessing risks to create the safety nets in our transactional structures that Mark talked about, which may take various forms that we prefer to keep confidential. But the process of getting to the deal is certainly more tedious now than ever before. However, executing the deal once it is set up remains fairly straightforward. When we say that things are calm out there and the operator community is ready to withstand a third wave, it truly reflects today’s improved operating environment versus six months ago. It feels very different, with new challenges emerging daily in facilities becoming standard operating procedures, including infection control and limited access. So, in that way, it is not complicated, but it is challenging to get to the right metrics and finalize agreements.

No, it does. And then just one last question. What does the current competitive landscape look like? Is there a lot of capital waiting to enter the space? Are you facing competition from the same players as previously or has it been too quiet that there are not many active players?

Yes. I would say the landscape is similar to what we've seen over the past 12 to 24 months, with private, well-capitalized buyers who deeply understand the skilled nursing facility business. We may be witnessing some of our REIT peers, who have been sidelined, gradually re-engage. So yes, there remains a substantial amount of capital searching for opportunities.

Our next question comes from Jonathan Hughes with Raymond James.

Thanks for the prepared remarks and disclosure. Dave, I was hoping you could talk about what happens to Trillium's EBITDAR coverage? That one kind of stood out to me regarding the drop in the second quarter.

Jonathan, thanks. Yes, so Trillium has moved up to the top 10 due to a rent increase that they had which took Trio's place. The first quarter of the COVID experience has significantly impacted Trillium, with labor costs increasing and a decrease in revenue reflected in the reported numbers you can see. The good news is, if there is any—and there is, Q3 is better than Q2, although still not quite up to the 1x coverage without HHS funds, but it’s significantly closer. We believe they are making the necessary changes to effectively manage through this period. Trillium exemplifies how crucial these HHS funds are, as revealed in the disclosures where we show the amortization of their relief funds through June of next year.

Okay. No, that's very helpful. And that disclosure is really useful, so thanks for putting that together. Jordan already covered my question on the pipeline, so just one more for me. If I know the pipeline is a bit larger than even last night, and you guys are optimistic. But if we enter January, February, and do not see significant movement in terms of investments, could we expect a larger dividend increase than in prior years to share some of the cash flow with investors? It has been raised 9% annually for the past five years, which is impressive. But I mean, could it be even higher if the investment pace remains uncertain as we turn the calendar?

Jonathan, it's Greg. I can’t say much about that at this point. We haven't discussed this in detail. Historically, we've been very committed to ensuring that this multiyear dividend trend continues to grow at a solid pace. However, we have also been committed to maintaining a payout ratio that allows us to reinvest funds back into the company when feasible, as that's our cheapest form of capital and provides the best returns for our shareholders. Thus, I can't predict future dividends, but we are dedicated to honoring both principles. Regarding timing for deals, again, historically speaking, we don’t see a considerable number of deals coming to market in November and December. Such activity usually occurs by September and October, particularly around NIC conferences, before the market quiets until January when everyone returns after the holidays. Therefore, while we are hopeful of closing additional deals by year-end, we have some promising prospects in the pipeline for next year. I just urge you to stay tuned and follow our progress, and we will continue to put positive outcomes on the Board as they arise.

Our next question comes from Steven Valiquette with Barclays.

Staying with the lease coverage ratios on Page 6, at the top 10 tenants. If you look at Column 3, which excludes the relief funds, it's interesting to note that seven of the companies are up on their coverage ratio while only three are down. I would have expected that across the industry we might see that percentage reversed. I guess I'm curious, what do you think are the common operating characteristics of the seven operators that managed to achieve better rent coverage in the June quarter? I would have assumed that this would correlate with the biggest falloffs in post-acute patient volume being referred in from the acute care setting, etc.

This is Dave. That’s a great question. The answer primarily lies in having—first, what we have in our top 10 is not necessarily what could be considered an index of the skilled nursing space. We pride ourselves in partnering with best-in-class operators. This business, pre-pandemic, during the pandemic, and post-pandemic, is incredibly sensitive to leadership and management. You can have the same brick-and-mortar facility, but a different operator can yield vastly different results, even with identical employees and residents. Management matters immensely. Hence, what you see reflected in these numbers is largely the capability to skill in place. That allows you to capture higher-margin patients while effectively marketing services as a solution to the problem in surrounding communities. Many of our operators are not only navigating the pandemic but positioning themselves to become the preferred operator for hospitals and assisted living facilities in their areas, needing to manage COVID patients. Therefore, the ability to skill in place significantly drives these numbers.

That's helpful. Just to confirm, is Premier the only company in that list primarily focused on senior housing?

Premier is focused on seniors housing, as is The Pennant Group. I would remind you that Pennant was part of Ensign Group until they spun off about a year ago, and primarily operates as a seniors housing provider for us. They also provide home health and hospice services in addition.

Yes, so we can track that one. So yes. OK. I think that covers it. Maybe just a quick follow-up. I'm not sure you'll take this question. But if you had to guess directionally for next quarter when these ratios are all shown, would you indicate directionally improving, staying about the same, or perhaps falling off slightly? If you could provide at least a directional view on how things might trend for the third quarter?

What you'll see is a bit of a mix, and I assert that because in many cases, folks who were hit hard initially may show some improvement, having adapted management approaches effectively through this time. Conversely, you may find some operators who benefitted from skills in place, were able to manage strong performance without significant pandemic-related impact early on. It was in Q3 that the second wave primarily affected the western states, housing many of our facilities. That, as you know, can be both a blessing and a curse from a financial standpoint, largely reliant on how they managed. While I cannot predict outright whether it will increase or decrease overall, I anticipate that some individuals may continue performing strong through all six months.

Our next question comes from Daniel Bernstein with Capital One.

I just echo my appreciation for the disclosures regarding the before and after of HHS funding on the coverages; that was incredibly helpful. My question revolves around whether CMS has been launching some toolkits for home health and efforts aimed at reducing institutional reliance in skilled nursing facilities. Given that these are in their infancy stages, combined with public home health providers piloting some skilled nursing cases at home, do you perceive skilled nursing at home as a threat to the skilled nursing industry and potentially a related threat to assisted living occupancy as well?

Dan, it's Greg. This is not a new conversation. It has intensified since the pandemic began. Many opinions circulate about how much of the traditional skilled nursing population could shift to home health, alongside recent comments from Seema Verma questioning whether long-stay Medicaid patients in nursing facilities may be better served with assisted living. Our position has always been that individuals who indeed could opt for alternatives have typically done so. While extraordinary measures are being adopted by home health and assisted living to maintain residents or attract new ones, alongside overwhelming fears of residing in a skilled nursing facility, we believe these are waning. We anticipate a solid return to a semblance of normalcy. While it's conceivable that some will shift, the patient population has been transitioning across the healthcare continuum for years. Individuals occupying nursing homes a decade ago frequently now spend more time in assisted living. This trend is evident and is expected to persist, but we also predict that hospitals will continue to aim to boost their census. Many elective surgeries are pending and, as such, should yield significant demand for skilled nursing facilities.

I imagine you think that discharge patterns will revert to normal at some point within the skilled nursing segment. I gather the timing of this has prompted the debate as to whether there has been a permanent change in those discharge patterns; however, you seem to indicate that some resemblance of normality should return once elective surgeries fully resume, is that correct? Or is it too premature to draw that conclusion?

We believe it's definitely too early to declare skilled nursing gone. Our thesis maintains that once we turn the corner and society returns to normal, we will revert essentially back to the conditions existing pre-COVID, both in operating, labor, and discharge environments from hospitals.

One more from me. Some of your peers have engaged in preferred and other forms of funding rather than acquiring assets outright. In relation to your pipeline, are you considering mezzanine or preferred lending arrangements rather than focusing solely on acquisitions?

Dan, it's Greg. We have indeed explored some mezzanine and preferred lending recently. However, we are not counting any of that in our pipeline at this moment. We remain open to it and have done preferred lending in the past. Additionally, we have compelling prospects on the horizon for more favored developments that we are excited about. Regarding mezzanine options, we have typically not engaged in these avenues before but remain receptive if the deal proves beneficial and collateral is secure.

Our next question comes from an unidentified analyst with BMO Capital Markets.

As a follow-up to Megan’s question, is the bigger picture that elective procedures haven't fully returned for your customer segment? Even though hospitals claim overall elective procedure volumes are returning, perhaps not for your targeted audience? Alternatively, could it be that your segment is temporarily losing market share to other options, including home health? I'm seeking clarity on the drivers impacting census.

Yes. The elective procedures discussion carries a bit of nuance, Juan, as most patients who arrive at skilled nursing facilities do so through emergency departments rather than well-scheduled elective surgeries. That being said, those cases do exist. However, historically, the number of those cases has diminished, with many easy patients—such as hips and knees—now being discharged home with home health. Ultimately, the sickest patients are the ones arriving at skilled nursing facilities, both pre-pandemic and currently. Consequently, occupancy is contingent not solely on elective procedures but significantly affected by the reopening of the economy, which would result in increased ER visits and consequently more admissions to skilled nursing facilities.

Therefore, you don't perceive that there has been a loss of share as such?

No, we currently lack data to substantiate that conclusion.

Lastly, I just want to address your strong balance sheet position. Is this because you want to hedge against downside risks since the duration of the pandemic remains uncertain? Or, should we consider that given the strong coverage numbers you've indicated for Q2 that you are poised to initiate actions sooner rather than later to leverage from this point on?

You can interpret this trend in leverage as decreasing due to COVID-explained acquisitions. However, over time, we would likely aim for higher leverage levels, given a stated range of 4 to 5x, depending on the deal size and its yield.

I'm not showing any further questions. At this time, I'd like to turn the call back over to our host for any closing remarks.

Thanks, Kevin, and thank you, everybody, for being on the call today. As always, if you have any additional questions, you know where to find us, and we're happy to visit with you at any time. Have a great weekend, and stay safe.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.