CareTrust REIT, Inc. Q1 FY2021 Earnings Call

Welcome to the CareTrust REIT First Quarter 2021 Earnings Conference Call. Participants should be aware that this call is being recorded and listeners are advised that any forward-looking statements made on today's call are based on management's current expectations, assumptions, and beliefs about CareTrust's business and the environment in which it operates. These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financings, and other matters and may or may not reference other matters affecting the company's business or the businesses of its tenants, including factors that are beyond their control, such as natural disasters, pandemics such as COVID-19 and governmental actions. The company's statements today and its business generally are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied herein. Listeners should not place undue reliance on forward-looking statements and are encouraged to review CareTrust's SEC filings for a more complete discussion of factors that could impact results as well as any financial or other statistical information required by the SEC Regulation G. Except as required by law, CareTrust REIT and its affiliates do not undertake to publicly update or revise any forward-looking statements, where changes arise as a result of new information, future events, changing circumstances or for any other reason. During the call, the company will reference non-GAAP metrics such as EBITDA, FFO, and F-A-D, or FAD, and normalized EBITDA, FFO, and FAD. When viewed together with GAAP results, the company believes these measures can provide a more complete understanding of its business, but cautions that they should not be relied upon to the exclusion of GAAP reports. Yesterday CareTrust filed its Form 10-K and accompanying press release and its quarterly financial supplement, each of which can be accessed on the Investor Relations section of CareTrust's website at www.caretrustreit.com. A replay of this call will also be available on the website for a limited period. On the call this morning are Bill Wagner, Chief Financial Officer; Dave Sedgwick, President and Chief Operating Officer; Mark Lamb, Chief Investment Officer; and Eric Gillis, Vice President of Portfolio Management and Investments. I will now turn the call over to Greg Stapley, CareTrust REIT's Chairman and CEO.

Thanks, Alexander, and good morning, everyone. We're pleased to be able to tell you that CareTrust's outstanding operators have proven remarkably stable overall thus far in this pandemic. Most of them have adversely confronted the hard task of adapting to the new realities of COVID’s changed operating environments, and those that have are faring well, but how long it will take for occupancy and normal hospital discharge patterns to resume is still unknown. So as vaccination rates rise and parts of the country begin to emerge from lockdowns, it's important to remember that the pandemic’s effects on the skilled nursing and seniors housing industries are far from over. Throughout the past year, we've worked hard to stay close to our tenants, collect all of our rents, pursue good acquisition opportunities, and carefully guard our balance sheet. Thankfully, having partnered with great operators in the first place, we have thus far been able to avoid some of the problems that beset others. But challenges remain on the horizon, and we will continue to be vigilant. We are pleased to report that we collected 100% of contract rents in the first quarter. We also collected 100% in April, and we appear to be on track to collect 100% in May. So despite the continuing headwinds and in light of the continuing government support, we remain cautiously optimistic about our tenants' prospects as occupancy begins to climb back. You saw this yesterday when we increased our 2021 guidance to reflect the recent acquisitions. To be sure, the government support has been critical. But if you look at page six of our supplemental published yesterday, you will see that we’ve again provided our operators' EBITDAR and EBITDAR lease coverages, both with and without CARES Act funding. Most of our skilled nursing and multi-service campus tenants, who account for about 86% of our rental revenue, are performing near to or better than their 2019 coverage metrics without the CARES funding. These particular operators are among the upper outliers in the industry. And many, in fact, most other providers out there still need that government support. So we continue to hope that the government will see the obvious value in extending the waiver of the three-day qualifying stay well beyond 2021. And that additional relief funding will come soon and in sufficient quantity to help those who need it to achieve the soft landing that the post-acute healthcare system and its predominantly elderly beneficiaries still need. For our part, with low leverage, great operator relationships, plenty of liquidity, and a great team here, CareTrust remains well-positioned to continue growing and pursuing our mission of pairing great operators with meaningful opportunities to transform individual facilities and by extension the industry as a whole for the better. So with that, I'll turn it over to Dave for more insight on what's happening out there. Then Mark will jump in with recent acquisitions in the pipeline, and Bill will finish off with the financials. Then, we'll open for Q&A. Dave?

Great. Thanks Greg, and good morning, everybody. In Q1, our skilled nursing operators reported a much-anticipated bottoming in skilled nursing occupancy. In January, we hit a pandemic-era low, but at the end of Q1, our SNFs reported a moderate recovery of 220 deaths. On the skilled mix front, the question has revolved around the rate of return to the pre-pandemic levels, now that COVID cases in the nursing homes have materially declined. At quarter end, our operators were still about 440 basis points above the pre-pandemic skilled mix norm. For seniors housing occupancy, and speaking relatively to what we've observed in the broader sector, we're pleased to highlight how resilient our seniors housing operators have been so far. COVID hit them hardest at the end of last year and at the start of this year. As skilled nursing and senior housing occupancy appears to have hit bottom and thus far has held steady. I wish we could predict the slope of recovery. But at this point, it's just too early to speculate. Our thesis is that we will return to pre-pandemic occupancy and coverage. The question of timing will remain unresolved for some time. Note again, that portfolio-wide our national commentary is only marginally relevant, since these businesses are hyper-local and extremely sensitive to the quality of the operators running them. Needless to say, we expect the rebound in occupancy to pre-pandemic levels to be asynchronous across the portfolio. Next, let me talk about our lease coverage. As Greg noted, you saw yesterday's supplemental, a continuation of our enhanced COVID-era disclosure, wherein we try to be as transparent and helpful as possible by reporting these coverages on an EBITDAR and EBITDARM basis, excluding CARES Act funding and including the CARES Act funds received and amortizing them through June of this year. Stripping out the CARES Act funds, we saw overall portfolio coverage hold steady, ticking up 4 basis points to 2.12 times. As we evaluate the length of their runway for those operators who have needed these funds, we remain constructive about the time that they have to climb their way back through this year and into next. Lastly, and on a related note, there remains roughly $24 billion in undistributed CARES Act funds. The transition to the new administration has slowed down the processing of those funds, but we understand progress is now being made. Additionally, $8.5 billion has been allocated for rural providers, and based on preliminary reports, approximately 154 of our facilities would qualify. With that, I'll pass the call over to Mark to talk about investments. Mark?

Thanks, Dave, and hello, everyone. As Greg and Dave reminded us, the pandemic remains at the forefront of everyone's mind right now, including potential buyers and sellers. We've not just been playing defense, however; we still feel that we have a mandate to grow and we've carefully preserved our liquidity and stayed active in the marketplace. Thanks to Joe, Josh, James, and the entire team here at CareTrust. We started off 2021 by adding over $150 million in very nice assets to the portfolio so far. As most of you know, in March, we closed on a very nice $4 billion CCRC portfolio for $126.1 million. The portfolio was located in extremely strong Southern California submarkets and represents some of the best real estate we've purchased since our start seven years ago. More importantly, we feel like we have matched the right operators with these assets with both Bayshire Senior Living and Aspen Skilled Healthcare stepping in. A few days later, we purchased a 145-bed SNF in Santa Barbara for $15.8 million with a lease in place with Covenant Care. Earlier this week, we announced the TechOn acquisition with Bayshire Senior Living as we acquired a 123-bed SNF here in Southern California from a COVID-weary single asset owner, who was ready to retire. That building sits in a market that enjoys little competition and deep labor pool and a staff that is eager for fresh leadership and a commitment to quality patient care. We were very pleased that Bayshire sourced and brought that deal to us. So as we sit here today, we have invested $151.7 million so far this year, and we look forward to seeing what the next few quarters look like in terms of actionable opportunities. We are pleased to know that the deal flow has picked up in recent weeks; the volume of current opportunities seems to be tilted towards the senior housing space. We are cautiously optimistic that we will see more and more SNF opportunities as mom-and-pop operators head for the exits and larger operators pare down their portfolios coming out of COVID. In speaking with the brokerage community, we expect the deal flow will continue to increase over the coming quarters, as operator fundamentals hopefully trend back toward pre-pandemic levels. As we sit here today, our pipeline has been reloaded back to our historical range of $125 million to $150 million. Its composition is primarily singles and doubles. But as usual, we're also investigating a couple of larger portfolios that look intriguing. Of the deals in our pipeline, each one is earmarked for existing operator benchmarks, which makes them easy to tack on and provides greater certainty for sellers. The active pipeline is predominantly SNFs with a few senior housing assets that we feel are a great fit for operators in that space. Please remember that when we quote our pipeline, we only quote deals we are actively pursuing under our current underwriting standards, and then only if we have a reasonable level of confidence that we can lock them up and close them in the relatively near term. And now I'll turn it over to Bill to discuss the financials.

Thanks, Mark. For the quarter, normalized FFO grew by 5.5% over the prior year quarter to $34.1 million or $0.36 per share, and normalized FAD grew by 7.4% to $36.1 million or $0.38 per share. During Q1, as we've done every year, we again raised our dividend this time by 6%. This increased our payout ratio for the quarter to 74% on FFO and 70% on FAD. This is consistent with our historical pattern. And as usual, we expected to come in over the course of the year, as we hopefully continue to grow the portfolio at solid spreads over our weighted average cost of capital. Leverage continues to be at all-time lows at a net debt-to-normalized EBITDA ratio of 3.7 times to date. Our net debt-to-enterprise value was 22.1% as of quarter end, and we achieved a fixed charge coverage ratio of 7.9 times. As Greg mentioned, with the 2021 investments made today, we are raising our previously released guidance by $0.6 on both ends of the range to normalize FFO per share of $1.46 to $1.48 and normalized FAD per share of $1.55 to $1.57. This guidance includes all investments and dispositions made to date, a share count of 96.1 million shares and also relies on the following assumptions: one, no additional investments or dispositions, nor any further debt or equity issuances this year; two, inflation-based rent escalations which account for almost all of our escalators at an average of 2%. Our total rental revenues for the year, again, including only acquisitions made to date, are projected at approximately $184 million, which includes less than $60,000 of straight-line rent; three, interest income of approximately $2 million; four, interest expense of approximately $24.3 million. In our calculations, we have assumed a LIBOR rate of 15 basis points and a grid-based margin rate of 125 basis points on the revolver and 150 basis points on the unsecured term loan. Interest expense also includes roughly $2 million of amortization of deferred financing fees. And five, we are projecting G&A of approximately $19 million to $20.9 million. This range is up approximately $1.5 million over our previously released guidance due to certain hurdles being met relating to our short-term incentive compensation program. Our G&A projection also includes roughly $7 million of amortization of stock compensation. Our leverage and liquidity positions remain strong. Year-to-date we have sold approximately 740,000 shares at an average price of $23.66 under a $500 million ATM program that we put up last year, for net proceeds of approximately $17.3 million. The outstanding balance on our $600 million revolver currently sits at $170 million, and we have approximately $24 million in cash. In addition, as Greg noted, cash collections for the quarter and for April came in at 100% of contractual rent and may appear to be on track to do the same thing. And with that, I'll turn it back to Greg.

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

Thank you, sir. You have your first question from Steven Valiquette with Barclays. Your line is now open.

Steve?

Sorry guys. I was having a temporary work-from-home crisis with the company. I apologize. So, yeah, look, congrats on these strong results. Good to see the guidance increases, and we're studying the coverage ratios across the largest banks, and everything looks pretty solid there as far as the whole portfolio. Just wanted to hear more about the pace of occupancy recovery. It definitely seems like across the industry, what's happening much faster in SNFs overall certainly versus senior housing. You mentioned there’s still choppiness in SNF occupancy recovery and maybe across some operators; just want to hear more about the volatility and the SNF side that I think you alluded to? Thanks.

Thank you for your question. There's not much additional detail I can provide at this time. We are quite early in the recovery process, with some facilities only weeks away from reaching their lowest points, depending on the local market. I believe we will have more information to share in the next quarter, including a better understanding of the recovery timeline. As I mentioned earlier, in the skilled nursing sector, analyzing occupancy is quite challenging. It varies significantly across the entire portfolio and even within the same state, as different operators and markets will recover at varying rates. I hope to provide more insights in our next update.

Okay. One quick follow-up. I mean, there's so many positive things going on. I hate to focus on a negative. Are there any signs, maybe just in a few geographies here and there where perhaps home health is taking some share from SNF during the recovery phase? And that's maybe causing some of the volatility, or is that not really a trend that you're seeing? Just curious, any high-level thoughts around that as well? Thanks.

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

Got it. Okay. All right. Thanks.

Yeah.

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

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

I don't think it's too dissimilar from what we said last quarter. I mean, you obviously need to understand what the run rate was pre-pandemic from a margin perspective, from an occupancy perspective? And you need to look at 2020 numbers to understand on the expense side, what is below? And then really, it's getting in the views with our operators to understand what specifically is not going to come back down on the expense side? And then on the occupancy front, I don't think anybody is expecting to get back on overall occupancy. We're certainly going to underwrite overall occupancy to get back to pre-pandemic levels for a period of time. So, I think, as we've done historically, we always look at each asset, and look at where the low-hanging fruit is? What changes can we make? Historically, we've changed operators. And so we continue to stick to our knitting on that front and see what we can churn on the expense side. As far as the top line and occupancy, it's really understanding those local markets and understanding why occupancy should get back to pre-pandemic levels is a function of relationships with the hospital or physician group in that particular sub-market. But I would say, overall, we're not assuming that if a building historically has run at maybe 90%, low 92% occupancy, we're not assuming that we're going to get back there in the near term. So what does coverage look like? What does coverage look like with maybe 80% or 85% occupancy? And what assumptions did we make for skilled nursing?

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

That's an interesting question. There’s a significant amount of capital waiting to invest. Today, the competition for skilled nursing facility acquisitions is as intense as it has ever been due to limited supply. So, first, will more smaller operators look to exit the market? Possibly, will the larger players reduce assets that no longer align with their strategy? This could apply to regional, super-regional, or even large operators with over 100 buildings. We expect to see deal flow from those sources. However, acquiring skilled nursing assets will be competitive. Private, sophisticated buyers often have operators and are very agile, making them strong competitors for us. It will be interesting to see the volume of deals we can close in the coming years, but I believe we will have a fair share of opportunities similar to what we've experienced recently. Greg, do you have anything to add?

No, I think that’s a great answer.

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

Yeah, I mean, I really can't comment too much on these opportunities. I mean, we're seeing opportunities, both on the SNF and seniors housing front. So they range in size; we've always kind of hit on a chunky, good size deal. If you look back at our historical kind of investment pipeline, and so we're always taking a look at the larger transactions that potentially can help us make our year. And this year is no different. And so, we're tracking a couple that are on market, and a couple that are not on the market, and we'll see what happens, but I think it's premature for us to comment on them at this point.

Okay. Great. Thanks. I appreciate it.

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

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

That's a great question, Connor. Unfortunately, we don't have a lot of real-time information about what's happening in hospitals; we understand it mainly from our operators and their insights on hospital flow. We've been monitoring public health systems and what they are saying. In some recent earnings calls, we've noticed a sense of optimism regarding a return of pent-up demand. The topic of elective surgeries seems to be a misconception since most nursing home patients admitted from hospitals actually started through the emergency department rather than scheduled procedures. As long as the nation, and particularly our individual markets, remain under some form of lockdown and restrictions, such as wearing masks and altered lifestyles, there will be limitations on people going out and living their lives, which impacts hospital volume. This is a point that some health systems have mentioned in their recent comments. We have always understood and discussed this as well. The key indicator for us will be when COVID restrictions are fully lifted, allowing people to return to normal lifestyles. It is difficult to envision our occupancy fully recovering before that occurs.

Thanks. That's very helpful. And I know you guys had mentioned the skilled mix earlier in the call. Just wondering if there's any sense of what it could look like, maybe at the end of this year, or perhaps the end of 2022?

Nope.

That's fair enough.

Hey, Connor. That's the correct answer, but we can probably give you a little more color on that. I think as you know skilled mix has been elevated, as our skilled nursing operators have been able to skill patients in place due to the waiver of the three-day qualifying stay, and because COVID was a qualified patient for skilled. We can still skill in place which is a great thing both for residents and for our operators and for the healthcare system in the payors. But COVID is down precipitously, thankfully, across the portfolio, and so we're just not seeing as many opportunities or needs to skill patients. And so we do expect that skilled mix to decline over time, as Dave said in his prepared remarks, to sort of a pre-pandemic norm. The question is how fast that will happen. And because that skilled mix and some of the extra revenue that comes with it has backfilled some of the revenue loss to the occupancy drop, the question is what the matches is going to be like between the occupancy recovery and the skilled mix normalization. So we're watching that really, really closely to see what happens and hoping that those elevated skilled revenues will continue to at least mitigate some of the occupancy revenue loss. Does that make sense?

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

No, I don't think there is any pressure on the length of stay. I'm not sure, Eric, but have you noticed anything regarding that?

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

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

You too, Connor.

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

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

We typically start around 9% to 9.25% yield, and as we've discussed over the years, we're willing to sacrifice some yield for better coverage. There are some groups that can accept lower yields, possibly in the high 7% range, because their spread overhead is significantly higher, in some cases 400 to 500 basis points. It’s those groups we’re potentially missing out on. They might have more flexibility regarding transaction terms, including guarantees. For us, it’s essential to ensure the structure of a transaction is right for both parties involved—the landlord and the operator. If it doesn’t align, we need to focus on getting the underwriting and economics sorted, while also ensuring the transaction structure works for both sides.

Okay, thanks. And then probably shifting to build, is for funding the growth maybe off of Mark's comments about the HUD financing with low coupons. Can you speak to your willingness to solely tap the debt markets right now? Certainly, pricing terms remain in favor of borrowers. You're below your targeted leverage range, maybe just thinking through how you can fund deals with pretty low-cost unsecured debt right now?

Yeah, rates still remain extremely low. And that is an attractive source of financing for us. Depending upon the size of the investment flow will dictate a lot of how we finance right now, as Mark said in his prepared remarks, a lot of the pipeline is made up of singles and doubles and I would just take it back to our ATM, which is just a wonderful tool to match fund those singles and doubles as they come across the finish line to issue some shares under that to finance those and maybe use a little bit of a revolver. We like where the leverage is; we like it below four. We think it helps us. So that's how I kind of think of financing for the next couple of quarters.

Okay, thanks a lot.

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

Hi, good morning. Thanks for the time. Just hoping you could talk a little bit about the watchlist. Any changes and now things are very fluid, but any color there would be appreciated. And if you could particularly talk about noble premier, housing operators have covered tenants sub 1x, how you feel about those two in particular?

Yeah, you bet. On the watchlist front, I think the comments we've made on that in previous quarters still stand, which is that if an operator was on the watchlist before the pandemic, they still are. They have largely been buoyed up by the government funding that has helped them; that is certainly true of those guys. And there's really nothing pressing or new on that front. We stay very close to them; we got great relationships with all of our operators. And are encouraged by the liquidity that they do have in place right now and the runway that they have. In terms of premiering noble, a little bit of a broken record on them as well. They have weathered the COVID storm that hit really hard at the end of last year and the beginning of this year, and their occupancy is still relatively strong related to where they started the pandemic at. And we're seeing them start to claw back and start to climb facility by facility a little bit here and there to get stronger there. So still two good operators, we feel really good about them. And we're fortunate that they've been where they have been during this pandemic.

Okay. Regarding government support, do you have any insight into what the rural distribution might imply? You mentioned that a certain number of facilities were eligible. Can you estimate how much runway that could provide for CareTrust or any other information that might help us understand the potential benefits?

Yes, this is Eric. We collaborate with consultants to stay informed about the provider relief funds. We have assessed our facilities, and a significant percentage of them would qualify. However, we still lack specific details on funding and its intended uses. It is expected that the funds could potentially offset their budgeted revenue, which would be beneficial. We anticipate that following the announcement regarding the remaining $24 billion of the CARES Act, there will be updates on the rural funds. We monitor this closely because many of our operators and facilities are likely to qualify for those funds. We believe this support will provide them with additional resources for a smoother recovery and help restore occupancy levels to pre-pandemic figures.

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

Yes, there is certainly a chance. However, based on the feedback we've received during this open comment period, many comments are being directed to CMS regarding their calculations and whether they accurately reflected the impact of PDPM on the increase. It appears there will be considerable feedback for them to address. Given their conciliatory tone, if they do proceed, it's likely that any recalibration will be implemented gradually over time. Nevertheless, many aspects remain uncertain, whether the changes will be strict or phased in gradually, or if the recalibration will be less severe. Our analysis suggests that our operators will manage well, especially since the operator most at risk in our portfolio has the strongest skilled names and also the highest coverage.

Thank you.

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

Thank you and good morning. I want to follow up on the pipeline. Mark, it seems like the $125 to $150 million is more focused on next year, with some emphasis on seniors housing. However, when you discussed the market flow, it appeared to be the opposite. You mentioned seniors housing having a larger weight, so could you clarify whether what you're seeing in terms of immediate underwriting is more heavily skewed towards skilled nursing? Is that correct?

So, let me clarify. So, what we're seeing in terms of deal flow from the market is more senior housing. Our pipeline and what we're focused on and underwriting is more SNF heavy. So, despite the fact that we're seeing heavier deal flow in the seniors housing side, we're still comfortable on the SNF stuff and continuing to see those opportunities. We're just not seeing the volumes on the flip side of that that we may be expected. But we're still seeing those opportunities. And that's what we're pursuing.

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

I believe there are a few important points to consider. We certainly examine the Medicare rate and make sure to account for the waiver, which serves as a qualifying survey to determine the effective run rate for Medicare. It's essential to have some margin of safety when assessing that rate. As we evaluate each individual asset, we see that the specific Medicare rate can vary, with each operator capturing their rate differently. Based on the MDS and the diagnoses of each resident, we develop an understanding of where the benchmark should be and then adjust accordingly. This process is tailored to the assets and aligns closely with our operators, as different buildings will have different acuity levels. Not all Medicare patients are the same; some communities might have very healthy patients with minimal comorbidities, while others might have patients with a complicated list of diagnoses. These differences are reflected in the MDS, which is the input data for Medicare patients. Therefore, it’s crucial to collaborate with our operators, understanding their expected patient flow and fine-tuning the appropriate Medicare number. Regarding adjustments before the reduction in PPM, we do analyze the potential impact of cutting rates by 3%, 5%, or 7%, to determine how that would affect coverage stability. Other variables also play a role, such as changes in Medicaid rates across states. Some states are transitioning from fixed rates to CMI-based acuity. Numerous factors contribute to this analysis, but the key is to work closely with operators, reviewing their Medicare and Medicaid daily rates, and evaluating the current performance of the buildings to ensure the operator can meet their projections.

Okay. That's helpful. Maybe one quick for you, Bill. On the ATM, your leverage, it’s 33, now it’s 37 and issued 700,000. Clearly, you didn't need the 700,000 shares in order to stay within your tolerance, right, because you're still below four to five. But I guess you're adding a little bit more capacity for yourself. How should we think about where you want to be sort of short to medium-term vis-à-vis four to five target, do you actually want to be under four?

We like operating under four.

Hey, Jordan, it’s Greg. I'll just tack on to that and tell you that, if you look at what we just did, we were running like 33 in February. And we just spent $150 million and didn't break for we really liked that. And it's already ratcheting back down to the 37 range. And so we'll be ready for the next $150 million deal should that come along. This seems to be a very good place for us; from the investors we've spoken with, they like it very much. And while we were not going to lower our target range to four to five times so that we could do the $300 million, $400 million, $500 million deal if it came along, and we do have the capability to do that. We really are going to do intend to stay kind of where we are in the threes.

Okay. That's helpful. Thank you guys.

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

Thanks for taking the call. I guess I have a question on the CPI bonds. In those senior guidance you went from 1.2 to 2.0. So I just want to understand a little bit better about how those CPI bumps are, I guess we set within those leases or they reset quarterly, maybe what they're linked to just want to get a better idea, the idea of that?

Sure. The CPI adjustments occur on the annual renewal date, which is once a year. Some of the leases have caps on the CPI charge as well as a floor of zero. We revised our guidance from 1.25% to 2% due to current CPI increases being above 2%.

All right. Okay. And then maybe a related question would be, if I was an operator, and I'm looking at inflation, I might not want a CPI based away. So have you had any pushback from potential new tenants in the deal sector that you're looking at? And people maybe want more of a fixed bump and a CPI bump?

Dan, it's Greg. No, we really haven't. Most of our operators really like CPI as opposed to fixed bumps, because they feel like it tracks better with their overall expenses, labor costs and everything else out there. And it just seems to be what you can't predict the exact number, it seems to be more predictable in terms of the economy and how their businesses fare. So we don't get a lot of pushback on CPI bumps as long as we can give them a raise that it won't go over. As Bill said, most of them also are capped at somewhere between for the Ensign leases, which were kind of semi-arms like leases. They have to two and a half. Other leases are capped at three and a half. So long as they got the cap on there and they can just go with the economy there. That's what they like actually.

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

You bet. Operator.

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

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