CareTrust REIT, Inc. Q2 FY2021 Earnings Call

Good day and thank you for joining us. Welcome to the CareTrust REIT's Second Quarter 2021 Earnings Conference Call. I will now turn the call over to Lauren Beale, SVP and Controller. Please proceed.

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

Thanks, Lauren, and good morning, everyone. In Q2, we continued to methodically execute our long-term business plan, despite the near-term challenges posed by the pandemic. We acquired some great facilities, refinanced some higher-cost debt, raised a little equity, saw our SNF census start to rebound, collected all of our contract rent and continued to refill our pipeline. But before we go into all of that, we note that as the current wave of Delta variant infections raises the possibility of more limitations on activities of daily living, the skilled nursing and seniors' housing industries continue to battle back from the downdraft in census that bottomed in the first quarter of this year. Not surprisingly, skilled nursing and seniors' housing facilities, which were a favorite target of critics in the early days of the pandemic, have today become some of the safest and healthiest places for vulnerable seniors and post-acute patients to be. We're proud to be associated with the people who provide these services, and we continue to base our business strategy on a commitment to move as many facilities as we can into the strongest operating hands possible. While our providers have risen to the challenge of protecting residents, patients, and staff from this highly infectious disease, they are still dealing with the lingering effects of the pandemic, most notably depressed census, increased labor costs, and a shortage of qualified workers. Our robust disclosure around lease coverage, which we began last fall, has clearly demonstrated the importance of provider relief funds for the skilled nursing industry. Our skilled nursing providers have fared well as the government has provided significant funding and other measures designed to fill the gaps created by decreased occupancy revenue and increased operating costs. We're hopeful that the industry will soon receive some or all of the remaining provider relief funds, which many operators still need. Our quarterly lease coverage disclosures have also highlighted the looming dangers of failing to provide direct financial support to senior housing. Census for assisted living providers is unlikely to recover as quickly as it will for skilled nursing. These providers, especially those serving mid-market and lower income clientele, provide a highly valuable and essential service to society, and there are compelling reasons for payors to want to keep those residents healthy and in place for as long as possible. We joined with many voices calling on the government to acknowledge the critical role that assisted living providers play in the healthcare continuum with direct relief funding. That said, we're very pleased with where we are today. This quarter, we posted double-digit normalized FFO per share growth of 10.2% over the same quarter last year and increased our dividend by 6% at the same time. We collected 100% of contract rents in Q2 and 96.2% thus far for July, and we believe that we can yet collect 100% of rents due this year. We grew the portfolio with $42.3 million in new investments since the last quarter, bringing our total capital deployment for the year to almost $185 million so far. We reduced our borrowing cost with the $400 million seven-year bond issue we completed in June at a 3.875% coupon to refinance our previous 5.25% bonds. This fixed and reduced that chunk of our long-term interest expense and pushed those maturities out to 2028. We held steady on leverage, with net debt-to-EBITDA of 3.7 times and debt-to-EV of 22.1% at quarter-end. We used our ATM to sell 288,000 shares in the quarter at an average of over $24 per share. And with all of that, we increased our FFO and FAD guidance yesterday, reflecting our constructive view of our own future and the future of the post-acute care and seniors housing industries, notwithstanding the near-term headwinds we are all facing. Other than that, it was a pretty boring quarter. So to wrap up, despite the short-term challenges with great operator relationships, plenty of liquidity, and a great team here, CareTrust remains well positioned to continue pursuing our mission of pairing great operators with meaningful opportunities to transform individual facilities, and by extension the industry as a whole for the better. With that, I'll turn it over to Dave to discuss the industry and our portfolio, then Mark will jump in with recent acquisitions in the pipeline, and Bill will finish off with the financials. Then, we'll open up for Q&A. Dave?

Thanks, Greg, and good morning, everybody. In Q2, our skilled nursing operators reported continued occupancy recovery. Looking at the facility-level data through May, 18% of our SNFs and campuses are at or above 100% of their pre-COVID occupancy and are moving in the right direction. For the SNF portfolio overall, occupancy has grown from January 4 of about 67% to around 70% in June, for a rate of recovery of about 60 bps per month. If that rate held constant, we would be looking at approximately next April to May to return to our pre-pandemic occupancy levels of 77.7%. However, we expect it to fluctuate a bit, due to a few factors like the Delta wave concerns, which we hope will be short-lived, seasonality, where Q3 is usually the softest quarter for skilled nursing census, and a reported inability in some markets to admit patients due to staff shortages, which we believe may be beginning to resolve. On the skilled mix front, at quarter-end, our operators were still roughly 150 bps above the pre-pandemic skilled mix norm, which continues to help offset some of the revenue loss while occupancy recovers. Seniors housing occupancy tells a somewhat different story. Before COVID, average occupancy in our portfolio was 84.5%. We appeared to hit a low point in March of 73.5%, and that level has held steady through June. While we expect seniors housing occupancy to recover and actually exceed pre-pandemic numbers at some point, as Greg mentioned, it will not happen nearly as quickly for assisted living as it is for skilled nursing. As a reminder, seniors housing only accounts for about 17% of our portfolio. Next, let me talk about our lease coverage. In yesterday's supplemental, we continued our enhanced COVID-era disclosure, wherein we tried to be as transparent and helpful as possible by reporting lease coverage on an EBITDAR and EBITDARM basis, both excluding CARES Act funding and including and amortizing the CARES Act funds received today. Since last quarter's supplemental, HHS updated the utilization and reporting guidelines for the CARES Act, so this supplemental's amortization methodology follows the updated guidance and provides a reassuring picture for most, if not all, of our skilled nursing tenants. Looking at the COVID-era numbers, overall portfolio EBITDAR coverage, excluding CARES Act funds, was essentially flat from the preceding quarter, ticking down slightly from 2.12 times for the nine months ending on 12/31/2020 to 2.07 times for the 12 months ending 03/31/2021. However, both of these numbers are considerably higher than the pre-pandemic number of 1.92 times for the 12 months ending on 03/31/2020. The relative strength comes from several of our skilled nursing operators, including Ensign, which has done an amazing job throughout. Predictably, if you've been watching our coverage disclosures, our seniors housing operators are facing strong headwinds right now. Our current assisted living operators were improving operations and coverage leading up to the pandemic, and they all largely held their own through 2020. However, January's sharp decrease in occupancy, coupled with elevated labor costs, has created a challenging operating environment. I'd like to point out on the Top 10 coverage slide that Noble's coverage is not apples-to-apples with last quarter's supplemental. We've removed two facilities from their coverage calculation as we are pursuing a sale of one, and the other has been undergoing a major remodel and has not been open for operating. Noble did not pay July rent and has requested a short-term deferral for July, August and part of September, backed by a plan to have all deferred rent paid before the end of the year. As we sit here today, we have not agreed to the deferral request, but are having positive discussions with them about their plan and path forward. All of our assisted living tenants have been very communicative and open with us about their situations and their efforts to weather the storm. For Noble, this has made it much easier for us to work with them as they chart a positive path forward, and we have reason to believe that they will continue to improve operationally, barring any major fallout from the current Delta wave. Shifting from our portfolio to the broader picture, we have a positive update regarding the remaining provider relief funds. First, we enjoyed a defensive win when Congress agreed not to tap into the unobligated provider relief funds to help pay for its current infrastructure bill. Second, it had previously been reported that roughly $24 billion remained in the provider relief funds. On July 19th, the Government Accountability Office reported a much higher amount of unobligated funds totaling $43.7 billion. Additionally, there remains another $8 billion in relief funds earmarked for rural providers, bringing the total unallocated and undistributed funds to about $52 billion. Regarding timing, we don't know. However, we understand that a program is at the White House for final approval, which would assist providers based on lost income and increased expenses during the second half of 2020 and the first quarter of 2021. Given D.C.'s current attention to the infrastructure bill, our understanding is that movement toward final approval and execution will wait until the current infrastructure bill is finished. Another positive development is that CMS has agreed to not change the PDPM formula until at least October 2022. This is certainly welcome news for a sector that is still very much battling the effects of the pandemic. Finally, about the Delta variant, we'll leave the predictions to the scientists and statisticians, but we can say both, based on the report this week from the American Health Care Association and the anecdotal reports from our tenants, that infection rates among nursing facility residents and staff are not climbing at anywhere near the rate being experienced in the general population, and so far nursing homes remain some of the safest places to be in America. With high vaccination rates, accurate rapid testing on site, which we did not have this time last year, and full infection protocols in place, we are hopeful that the Delta wave will be nothing like the original outbreaks in 2020. With that, I'll pass the call over to Mark to talk about investments. Mark?

Thanks, Dave, and good morning, everyone. In Q2, we continued to be aggressive on the acquisition front with two investments that we believe will be accretive not only to us, but our operators as well. First, at the end of April, we acquired a 123-bed skilled nursing facility for $9.8 million in an off-market transaction brought to us by our tenant, Bayshire Senior Communities. The facility was a value-add opportunity in a secondary market here in Southern California, and the prior operator was a single asset mom-and-pop provider. It was a great match for Bayshire, whose principles have extensive relationships and operating experience serving higher acuity patients from that market, who have consistently been transferred to other markets due to a lack of sophisticated local care. Bayshire is now bringing that level of operational sophistication and quality care to the facility, and the community response has been gratifying. Second, earlier this week, we announced the acquisition of two state-of-the-art skilled nursing facilities located in Austin, Texas, which we leased to the operating affiliates of the Ensign Group. The facilities add to Ensign's existing footprint in Austin and strengthen their position in Texas, which they cited on their call last week as one of their highest performing states. For CareTrust, the transaction allowed us to grow with the bluest of blue chips in Ensign, in a state we like and in arguably the hottest real estate and growth market in the country. The two assets, which were both constructed in 2017, were purchased from the original developer in an off-market transaction for approximately $32.5 million, inclusive of transaction costs. Ensign opted to make an upfront rent reduction payment of $5 million at closing, and the annual cash rent under the existing master lease to which the facilities were added was increased by approximately $2.2 million. This produced a first-year cash-on-cash yield to CareTrust of approximately 8%, which is lower than our typical going-in yield on skilled nursing assets, but reflects the credit and operating strength of a premier operator in Ensign. Both the California and Texas transactions were funded using CareTrust's $600 million unsecured revolving credit facility. Through today, we have invested $184.1 million so far this year, and we will continue to press forward on the acquisition front to hopefully finish off the year with the kind of external growth results you are accustomed to seeing from us prior to the pandemic. As for the market, deal flow has been somewhat consistent over the past few weeks and months with a number of one-off skilled nursing facilities hitting the market with very little volume for small-to-mid-sized portfolios. On the seniors' housing front, we're seeing the entire range from half-empty turnarounds to performing Class A product. I can say, as a whole, in both the skilled nursing and seniors' housing spaces, pricing at this point in time is dislocated from property-level performance. But we continue to underwrite carefully and look for opportunities that fit us and our operating partners. Lastly, our pipeline has been reloaded back to our historical range of $100 million to $125 million. The pipeline is made up of singles and doubles, and we continue to pursue pieces of larger portfolios that look interesting to us. The pipeline opportunities will allow us to do tack-ons with some of our existing operators and also begin new relationships with operators that we have recorded over the past 12 to 18 months. Finally, the composition of the pipeline is largely skilled nursing facilities, with a few potential mezzanine loan relationship opportunities that we think could be a good long-term fit for the skilled nursing investment thesis. Please remember that when we quote our pipeline, we only quote deals that we are actively pursuing under current underwriting standards, and then only if we have a reasonable level of confidence that we can lock them up and close them in the relatively near term. And now, I'll turn it to Bill to discuss the financials.

Thanks, Mark. For the quarter, normalized FFO grew by 11.4% over the prior year quarter to $35.8 million, and normalized FAD grew by 13.5% to $38.1 million. On a per share basis, normalized FFO grew by 10.2% over the prior year quarter to $0.37 per share, and normalized FAD grew by 12.3% to $0.40 per share. During the second quarter, we issued $400 million in new senior notes due in 2028 at an interest rate of 3.875%. The proceeds of the issuance were used to pay off the 5.25%, $300 million senior notes due in 2025 and the related call premium, plus recent expenses of the issuance, and the remaining funds were used to pay down the revolver to about $50 million. More on this transaction and the quarterly impact from it can be seen in our supplemental, on Page 6. Moving on to guidance. We are raising our previously released guidance by $0.02 on both ends of the range. For normalized FFO per share to $1.48 to $1.50 and normalized FAD per share to $1.57 to $1.59. This guidance includes all investments and dispositions made to date, a share count of 96.9 million shares, and also relies on the following assumptions: One, no additional investments, dispositions or reserves, 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 $186 million, which includes less than $60,000 of straight-line rent. Three, interest income of approximately $2 million. Four, interest expense of approximately $24 million. In our calculations, we have assumed a LIBOR rate of 15 bps and a grid-based margin rate of 125 bps on the revolver, and 150 bps on the unsecured term loan. Interest expense also includes roughly $2 million of amortization of deferred financing fees. Not included in interest expense is a $10.8 million charge that we will take in Q3 related to the refinancing. The $10.8 million is made up of $7.9 million of redemption fees and a $2.9 million write-off of deferred financing fees. And five, we are projecting G&A of approximately $19.6 million to $21.5 million. This range is up approximately $600,000 over the previously released guidance due to certain hurdles being met relating to our short-term incentive compensation program. Our G&A projection also includes roughly $7 million of amortization of stock compensation. Our liquidity remains extremely strong with approximately $25 million in cash, $500 million available under our revolver, having drawn $50 million on it since quarter-end, and we produced roughly $12 million in cash after we pay the dividend every quarter. We also raised almost $7 million of equity off our ATM, at an average price of $24.05 during the quarter. Leverage continues to be strong with a net debt to normalized EBITDA ratio of 3.7 times today. Our net debt to enterprise value was 22.1% as of quarter end, and we achieved a fixed charge coverage ratio of 8.1 times. Lastly, cash collections for the quarter came in at 100% of contractual rent, and July came in at 96.2%. I would expect August to be similar to July based on the color given on the call today. And with that, I will turn it back to Greg.

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

Certainly. And your first question is from Juan Sanabria of BMO Capital Markets.

Hi, good morning. Just hoping you could talk a little bit about the seniors' housing performance on the assisted living side, with basically flattish occupancy. What do you think is holding that back? We've seen a bunch of your peers who are both AL and IL, exposed to a bit better bounce off the bottom. So just curious if it's maybe smaller facilities or labor constraints that you kind of touched on, but any color on the lack of growth and occupancy would be helpful. Thank you.

Thanks, Juan. This is Dave. What we've heard from our operators is that some local restrictions on visitation have been a challenge, and staffing has also been difficult for some of them in order to grow the occupancy. The occupancy numbers that we provided are really through June, but we do have some more real-time info that's more positive. We're seeing in some parts of our portfolio some real momentum in occupancy. As we sit here today, from July even to August, that's going to represent a pretty good improvement over what we've reported through June. For example, in a particular state, we had some buildings in Michigan that were at 73% occupancy in June, that are today at 79% and projecting to be at 82% by the end of this month. So we did have some of a stalemate there, but it looks like we're starting to pick up some positive momentum.

Are there restrictions on visitations for some of your operators? And are those self-imposed or mandated by local authorities?

For the most part, the restrictions have been lifted as the most restrictive measures were in place last year. However, some operators approach their policies a little differently; some are more cautious than others. But at this point, I think all of the facilities are open for business and open for admissions, with one exception where we have one building in the portfolio that we're aware of, that is dealing with a small outbreak of the Delta variant.

Okay. And maybe a question on the balance sheet with regards to how willing you are to get more aggressive in terms of leveraging your historical targeted range seeing as you're at 3.7, which is very cautious and conservative. But are you at the point where you're willing to become more offensive? Or given the Delta variant, would you prefer to kind of stick where you are and keep it low and just have that insurance policy?

Juan, this is Greg. We've always been learning to be more aggressive if the situation or opportunities merit it. That's why we keep it low. It's not really a cushion, although it works that way. Our thesis for keeping it low is that we want to be able to do the significant deal when it comes along. Right now, it's probably not the time for that. As Mark mentioned in his prepared remarks, pricing for all assets is rather severely dislocated from normal underwriting standards and the realities on the ground. We are still sitting on that dry powder, but we will not hesitate to use it when the time arises, if the opportunity presents itself.

Thank you.

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

Hey, guys. I'm just wondering how we should be thinking about investments today. I think last quarter you mentioned that there could be some larger portfolios that you were looking at, and it sounds like today, it's mostly singles and doubles. So I guess, have those larger portfolios just not come to the market, maybe to the level that you had expected? Or what are you seeing on the acquisition front?

This is Greg. I'll take that and then Mark can fill in if I miss anything. Look, there are a couple of larger portfolios out there. We think we see everything that comes through the marketing; as this quarter demonstrated, we actually see stuff that doesn't come to the market. So we've got a pretty comprehensive view of what's going on. We would just tell you that the portfolios always carry a premium that's seldom justified, but just the norm. In the current environment, it's really tough to get to the pricing that some are willing to pay for the larger portfolios. So we've always said we are opportunistic buyers, and that if the opportunities weren't there, we were always comfortable taking our money and heading for the sidelines. We're not on the sidelines now; as you're seeing, we've been having a pretty good year so far. But it has required us to really dig in and seek out smaller deals. The portfolio that we acquired in March was four buildings, but at $125 million, that wasn't small. Right now, with our pipeline at $100 million to $125 million, we are primarily focused on singles as the big portfolios are priced out of range, especially given the financial distress that still lingers across the industry. Mark, do you have anything to add?

Yes, I would just say that when you're looking at larger portfolios, you're often looking to partner with operators, whose situations can change from time to time. So depending on what happens with Delta, they may or may not be in a position to take on more buildings into their portfolio. It's a little bit of a fluid situation in terms of matching assets with operators, assuming that we can get there on pricing.

Got it, okay. And then in terms of the provider relief funds, so there is $52 billion left. What would be the expectation, or what would prevent them from distributing that full amount as opposed to holding some of that back? What are your expectations there, and what’s the potential, in your eyes, for seniors housing to get a chunk of that?

Yes, this is Dave. Good question. The expectation is that the whole $52 billion would be in play eventually. There was some talk about holding some back to correct mistakes arising from prior phases, either miscalculations or money going to the wrong operator because of changes of ownership, that sort of thing, but that would essentially still distribute all of the money. We have not heard any reporting or rationale for them to withhold any dollars from providers. It's our understanding that this phase, for now, would include seniors housing operators, but at this point, we can't guarantee that; that's just what we've been told by those closer to the situation than we are.

Got it. Okay. Thank you, guys.

You bet. Welcome.

Thank you. Your next question is from Jordan Sadler of KeyBanc Capital.

Hey, this is Arthur Porto on for Jordan. Just one question for me. We noticed that you closed your first acquisition alongside Ensign for the first time in a while, maybe even since the spin-off of the company. Is this the beginning of a more active relationship with Ensign, or was this more of a one-off transaction? Thanks.

Arthur, this is Greg. Look, we never stopped having an active relationship with Ensign. What we had was a significant need following the spin-off to diversify the portfolio. It took us a long time to educate the investor community regarding the benefits of our Ensign concentration. It wasn't until we were well under 50% concentrated with them that people started to understand as their coverage climbed. We've always wanted to do business with Ensign. We think highly of them as operators. In fact, we don't believe there is anyone better out there. They are just a great partner to have in the portfolio. Finding opportunities that meet their stringent underwriting and expansion standards has been part of our challenge. We've tried things over the years, but it's only recently that we've actually found assets in their markets that are a good match for them and been able to execute this deal. It was a standout deal for them and a standout deal for us. We love these assets. These were the last assets that Mark and I toured before the pandemic back in late February of 2020, and we had to keep that deal warm through the turmoil of the last year in order to get it done. But we’re very grateful we did, and we hope we’ll be able to do more deals like that and more deals with Ensign in the future.

Thank you. Your next question is from Steven Valiquette of Barclays.

Thanks. Hello, everyone. Thanks for taking my question. First, if we think about your rent diversification by state, this was touched on a little bit, but one of your skilled nursing peers noted that some of the rising labor pressure in wages can be difficult to manage in states with limited or no COVID-19 reimbursement relief. So, I guess, I'm curious if you can speak at a high level to CTRE's exposure to major states with limited or no COVID relief for operators or if there is a lack of exposure, which would obviously be positive from that end. Thanks.

Thanks for the question. Right now, the performance, whether positive or stressed, is not really correlated with that issue. We've been generally pleased with how the states have responded with FMAP increases or across-the-board Medicaid rate increases in most of our states. We feel the state response coupled with the federal response has been good. However, as we've indicated today, more is definitely needed. We are anxious to see the phase for funding approved and distributed in the months to come.

Okay, great. One quick follow-up here. You had a great slide deck back at REIT week in June that might have been somewhat overlooked in the investment community. I had one question around one of the slides there. So, one of the slides, it was Page 19, but essentially it showed your monthly skilled mix occupancy and how that's benefited from the elimination of the three-day hospital stay rule. It peaked at around 26% in December of 2020, and you've come back down a little bit in the first four months or five months of 2021, which was a bit surprising to me. So, the questions are, what's your latest intel on the duration of the suspension of the three-day hospital stay requirement? And then two, if you had to predict how your skilled mix occupancy will progress for the rest of 2021, how would you characterize it? Thanks.

Yes. Great, thank you. We weren't surprised that the skilled mix has dropped; it really correlates closely with the decline in COVID in the facilities – it's almost an exact mirror of that peaking in December when the vaccine came in, and new cases of COVID have just dropped sharply since December. The skilled mix has dropped as operators lose those skilled patients, but they have been able to maintain a little bit higher average than pre-pandemic levels for skilled mix due to the three-day qualifying stay waiver as you stated. Our understanding is that this is, as of today, still in place through the end of this year. Talking to some of our operators, Ensign mentioned this on their earnings call as well, many believe they will be able to maintain an elevated level of skilled mix over pre-pandemic levels throughout this year. Of course, it's impossible to predict, but that's the latest intel we have.

Okay. All right, great. That's great color. Thanks.

Thank you. Your next question is from Daniel Bernstein of Capital One.

Hi. I guess my question about the Ensign relationship was actually asked, but in that same context, Ensign on their earnings call mentioned that some of the properties are – I guess, some of the new properties they are leasing with you were operators that exited the business. So maybe if you could talk about this, in terms of your pipeline, are you seeing a lot more operators exiting the business than before or maybe pre-COVID? And are any potential tax implications coming out of the federal government potentially an impetus for that? Thanks.

Hey, Dan, it's Greg. The operator that Ensign replaced in those two Texas buildings is not exiting the business; they were just exiting those particular facilities but are still active elsewhere. In terms of what's happening out there with the assets on the market, we do hear from time to time that people are motivated by fear of capital gains tax increases that could come in the future, but that isn't really a major motivating factor for anyone to sell. Usually, there's other circumstances at play, which we are addressing as best we can in the deals we pursue. We are not seeing tax motivations for these sales.

Okay. All right. That was the only question I had. I appreciate it. Thanks, guys.

You bet.

We have no further questions. I will turn the call back over to management for any additional or closing remarks.

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

Yes, we have Jonathan Hughes of Raymond James.

Hey, good afternoon. Thanks for squeezing me in, I appreciate it. Bill, can you go back to guidance. I don't know if I heard you correctly or mistakenly, but did you say you expect rent collections going forward to look a lot like July, but the guidance includes no rent shortfall?

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

Okay. So the cadence would then be for like the third quarter may be down a little and then reverse itself in the fourth quarter?

Yes, but we're keeping the tenant that we mentioned on an accrual basis, because we feel the collections are probable.

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

Sure, Jonathan, it's Dave. Covenant Care was among the hardest hit in our portfolio. From a census perspective, they dropped from around 90% occupancy pre-pandemic down to 70%. Labor costs were also hit hard there. Their six buildings with us are a small piece of their overall portfolio. However, they are situated in rural markets that have just had a bit of a tougher time with COVID compared to the rest of their portfolio, which is more urban-based and recovering much better. They were covering well before the pandemic, and we believe they've bottomed and are on their way back. The parent company credit gives us no cause for concern in the short run.

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

That's right.

Okay. And then just one more from me, maybe for Mark or Greg. Given this dislocation in pricing versus fundamentals for acquisitions, would a potential sale of some properties provide you an opportunity to perhaps move on and try to deploy capital elsewhere? I'm just getting at – is there any potential for capital recycling in the next six months to 12 months?

Well, Jonathan, it's Greg. We did mention in our prepared remarks one facility that we are now slated for sale, it’s a very, very small deal, in fact, immaterial. However, we don't really look at the portfolio that way. Our portfolio is relatively young and has not had a lot of time to appreciate significantly in value. Therefore, we don't see a lot of upside in the value of our facilities that might be captured with a sale like that. We're not against it; we just don't see it as a viable strategy right now.

Okay. Yes, I didn't see that as a deal. That was the one in Noble; I would guess there was just more asking on a larger scale, but you just addressed that, so. Okay, that's all I had. I appreciate the time. Enjoy the weekend.

You too.

Thanks. You too.

We have no further questions. Thank you, everyone, for being on. We hope you have a nice weekend, and as always, you know where to reach us if you have any additional questions. Take care. Thank you. This does conclude today’s conference call. You may now disconnect.