CareTrust REIT Inc (CTRE) 2021 Q1 法說會逐字稿

Welcome to the CareTrust REIT's First 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 the 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-Q and accompanying press release and its quarterly financial supplement, each of which can be accessed of 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 effect on the skilled nursing and seniors housing industries are far from over.

For our part, 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 have 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 in spite of 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 6 of our supplemental, published yesterday, you will see that we've again given you our operators EBITDAR and EBITDARM lease coverages, both with and without CARES Act funding. Most of our skilled nursing and multiservice 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. Granted, 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 such things as extending the waiver of the 3-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 health care system and it's 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 some more color on what's happening out there. Then Mark will jump in with recent acquisitions in the pipeline, and Bill will finish off 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 bps. On the skilled mix front, the question has revolved around the rate of return to the pre-pandemic levels there as well, now that COVID cases in the nursing homes have materially declined. At quarter end, our operators were still about 440 bps 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 with skilled nursing, seniors 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, noting again that portfolio-wide or 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 see in yesterday's supplemental a continuation of our enhanced COVID-era disclosure, wherein we try 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 the CARES Act funds received to date, and amortizing them through June of this year. Stripping out the CARES Act funds, we saw overall portfolio coverage hold steady, ticking up 4 bps to 2.12x. 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 David 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 have 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 building CCRC portfolio for $126.1 million. The portfolio is located in extremely strong Southern California submarkets and represents some of the best real estate we have purchased since our start 7 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. And earlier this week, we announced a tack-on 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, a 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 note that deal flow has picked up in recent weeks. The volume of current opportunities seems to be tilted towards the seniors 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 pipe 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 are also investigating a couple of larger portfolios that look intriguing. Of the deals in the pipeline, each one is earmarked for existing operator bench, which makes them easy to tack on and provides greater certainty for sellers. The active pipe is predominantly SNFs, with a few seniors housing assets that we feel are great fits for our operators in that space.

Please remember that when we quote our pipe, 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, and 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 expect it 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 3.7x today. Our net debt to enterprise value was 22.1% as of quarter end, and we achieved a fixed charge coverage ratio of 7.9x.

As Greg mentioned, with the 2021 investments made to date, we are raising our previously released guidance by $0.06 on both ends of the range to normalized 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 bps and a grid-based margin rate of 125 bps on the revolver and 150 bps on an 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 comp.

Our leverage and our liquidity positions remain strong. Year-to-date, we have sold approximately 740,000 shares at an average price of $23.66 under our $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 appears to be on track to do the same thing.

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

Thanks, Bill, and 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?

(Operator Instructions) We have your first question from Steven Valiquette with Barclays.

Steve?

Sorry, guys. Yes, I was having a temporary work-from-home crisis with the -- I apologize. So yes, look, congrats on these strong results, good to see the guidance increases, and we're studying the coverage ratios across the largest tenants. Everything looks pretty solid there as far as the overall portfolio.

Just wanted to hear more about the pace of occupancy recovery. It definitely seems like across the industry, it was happening much faster in SNFs overall, certainly versus senior housing. But just I think you mentioned still some choppiness in the SNF occupancy recovery, maybe across some operators. I just want to hear more about the volatility on the SNF side that I think you alluded to.

Yes. Thanks for that question. Yes, there's not a whole lot of color to give. It's -- we're really early in -- really just weeks away, in some cases -- from seeing the bottom depending on the facility and the local market that you're talking about. So I think -- I hope that next quarter, we'll have some more color to share, a little bit more of a track record of -- and time from what we would call the bottom. But like I said in my prepared remarks, when you're talking about the skilled nursing sector occupancy, it's really difficult to do that, even across the whole portfolio, much less the whole country. You really have to look at an operator by operator, and some markets within the same-state will recover at very different paces. And so hopefully, we'll have some more color to give you next time.

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 or there, where perhaps home health has taken 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.

Yes, 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 that may have something to do with it, but we don't have any real insight from our operators on that front.

We have your next question from Michael Carroll with RBC Capital Markets.

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

Yes. So 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 kind of pre pandemic from a margin perspective, from an occupancy perspective. Then you need to look at 2020 numbers to understand, on the expense side, what has ballooned. Then, really, it's getting in the weeds 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 not underwriting 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 day 1 changes can we make. Historically, we've changed operators. And so we continue to stick to our knitting on that front and see we can trim on the expense side. But as far as top line and occupancy, it's really understanding those local markets and understanding why occupancy should get back to pre-pandemic levels. Is it relationships with the hospital or a physician group in that particular submarket?

But I would say, overall, we're not assuming that if a building historically has run maybe 90 -- low 92% occupancy, we're not assuming that they'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 assumption do we make for skilled mix?

Okay. And then what are you seeing on the investment opportunity 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, we think that some of the SNF volumes that you're able to find is going to, I guess, maybe exceed what you were doing maybe even a few years ago, just because there's a bigger opportunity set?

Yes, that's an interesting question. I mean there's an awful lot of capital on the sideline waiting to pounce. I mean I think today is as competitive on the SNF acquisition front as it's ever been, just due to the lack of supply. So I think the first part of your question is, will more and more mom-and-pops head for the hills? Potentially. Do the larger guys kind of pare down on assets that strategically don't fit, whether that's kind of the regional, super-regional, or even the large players with 100-plus buildings. So we would expect to see deal flow coming from those buckets. But at the same time, too, in terms of what we will be able to grab, that will be interesting, because there's a lot of competition to acquire skilled nursing assets today. And private, very sophisticated buyers, oftentimes with operators and/or an operating arm to their real estate company, are very nimble and are very competitive with us. And so it will be interesting to see what volumes we'll be able to do over the next couple of years, but I think we'll have our fair share of opportunities as we've seen them over the past few. Greg, do you have anything to add?

No, I think that was a great answer.

And 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? How big are they? It sounds like this is going to be an operator going to be transitioning out?

Yes. I mean I really can't comment too much on these opportunities. I mean they're -- we're seeing opportunities both on the SNF and ALF front, or seniors housing front, and so they range in size. We've always kind of hit on a chunky, good-sized 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, 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 that at this point.

We have your next question from Connor Siversky with Berenberg.

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.

Well, that's a great question, Connor. And unfortunately, we don't have a ton of real-time intel on what's happening in the hospitals. We get it from being close to our operators and hearing what they're saying in terms of hospital flow. We're paying attention to the public health systems and hospitals and what they're talking about. And in some of those recent earnings calls, we took note of some optimism that they're expressing that there is some pent-up demand that's coming back.

The elective surgeries are a little bit of a, I think, a misconception, since the vast majority of the nursing home patients that are admitted from the hospital actually started their journey through the emergency department, not necessarily a conveniently scheduled elective surgery. And to the extent that the nation, or really, for us, the individual markets are still in some form of lockdown, wearing masks, not going out and living life as normal, there's going to be a little bit of a constraint on people going out and living their lives again, which leads to that hospital volume. That's actually precisely what some of the hospital or health systems talked about in their remarks recently, and it's something that we've always understood and tried to talk about as well.

So the key kind of lead indicator for us is going to be that, that the restrictions related to COVID entirely are lifted, and people will get back to their normal lives. Hard to imagine that our occupancy fully recovers before that happens.

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

Nope.

That's fair enough.

Connor, no, 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 people in place due to the waiver of the 3-day qualifying stay, and because COVID qualified a patient for skilled. We can still skill in place, which is a great thing, both for residents and for our operators, and for the health care system and the payers. 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 lost due to the occupancy drop, the question is what the match 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?

Yes. Yes. 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 -- I haven't heard of any pressure on length of stay. I don't know, Eric, how about -- do you have -- have you seen something on 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, but it's been fairly consistent.

We have your next question from Todd Stender with Wells Fargo.

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 maybe that you're losing?

Yes. I think we always start kind of in and around 9%, 9.25% on our going-in lease yield. As we've talked about over the years, we're willing to give up a little bit of yield for coverage. So just in terms of losing out, I think I think there are groups that have the ability to go into the 8s, and in some instances, maybe even the high 7s, the private guys, because they're spread over HUD ends up being, in some cases, 400 to 500 basis points. So I think it's those groups that are willing to shave to kind of go down into the high 7s that we're missing out to. So -- and they maybe are a little more free in terms of what sort of terms they need, from a transactional perspective, going in the door and in terms of guarantees and that sort of thing.

So we're -- sometimes on portfolio transactions, we want to make sure that structurally, it's right for us, and it's right for our tenant. And if it's not, then we've -- obviously, you've got to get the underwriting and the economics right, but you also got to get -- to make sure that the transaction's structure right for both landlord and the operator.

Okay. And then probably shifting to Bill, just for funding the growth, maybe to build 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, it's pricing and 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.

Yes. Rates still remain extremely low, and that is an attractive source of financing for us. Depending upon investment, flow, size is going to dictate a lot of how we finance. Right now, as Mark said in his prepared remarks, a lot of the pipe is made up of singles and doubles. And I would just take you 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 the revolver. We like where the leverage is. We like it below 4. We think it's helped us. So that's how I kind of think of financing is for the next couple of quarters.

We have your next question from Juan Sanabria with BMO Capital Markets.

Just hoping you could talk a little bit about the watch list, any changes I know things are very fluid, but any color there would be appreciated. And if you could particularly talk about Noble or Premier, seniors housing operators with coverage kind of sub 1x, how you feel about those 2 in particular.

Yes, you bet. On the -- as far as the watch list goes, I think the comments we've made on that in previous quarters still stands, which is that if an operator was on the watch list before the pandemic, they still are. And 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've 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 Premier and Noble, a little bit of a broken record on them as well. They've weathered the COVID storm that hit really hard at the end of last year and the beginning of this year, hit their portfolio the hardest in terms of time -- in terms of timing. 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 2 good operators, feel really good about them, and really fortunate that they've been where they have been during this pandemic.

Okay. And then just on the reimbursement side, or actually, I should say just the government support, any sense of what that rural distribution could mean? You said that x amount of facilities were eligible. Do you know how much runway that could provide you guys or any other tidbits to help us think about what that could mean as a benefit for CareTrust?

Yes, this is Eric. We work with some consultants that keep us up to date with what's being said and worked on from a perspective of the provider relief funds. We've looked at our facilities, how many would qualify. It's a large percentage of that. We still don't know details on funding and really where they're going to be able to use those funds. It's anticipated that it will be possibly against their budgeted revenue, which would be nice. But we hope that after the announcement with what's remaining in the $24 billion of the CARES Act, that an announcement will be made after that regarding the rural funds. We stay close to that, largely because we know that a lot of our operators and a lot of our facilities will qualify for those funds. And obviously, we believe that it will give them an even more runway to have a soft landing and get that occupancy back up to where it was pre pandemic.

And one last one 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 informed view of how much above revenue neutral it ended up being to so far?

Yes. I think there certainly is a chance. But what we're hearing so far in this open comment period is that there's a lot of comments going back to CMS about how they calculated that number and whether or not they fully captured PDPM's impact on that increase. I think that there's going to be quite a bit of comments for them to deal with there. And based on their conciliatory tone, even if they do go forward with it, it seems like the most likely implementation of a recalibration would be staged over time. But there's still a lot to be determined on that front. Regardless of whether it's draconian or phased over time or reduced in terms of that recalibration, as we've done the math, we think our operators are going to be just fine, particularly because the operators most at risk in our portfolio that have the highest skilled mix also happened to have the highest coverage.

We have your next question from Jordan Sadler with KeyBanc Capital Markets.

I want to follow-up on first, the pipeline, maybe, Mark. It sounded on one hand, that the stuff that teed up, the 125 to 150, more weighted towards SNFs, with a mix of some seniors housing here and there. But when I think you talked about sort of the funnel or the flow in the market, it was sort of the other way around. I think you talked about seniors housing having a greater weighting. So could you maybe just clarify for us? What you're seeing front and center in underwriting imminently is more skilled nursing heavy. Is that correct?

So yes, let me just clarify. So what we're seeing in terms of deal flow from the market is more seniors housing. Our pipeline and what we're focused on and under LOI 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 SNF side 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 with Juan is relatively new news, to the extent that you've been due diligencing assets that are under LOI. How is this impacting your underwriting? What are you doing?

Well, I think there's a couple of things. I think we look at -- we certainly look at the Medicare rate. You've obviously got to back out, to the extent you can, the waiver of the 3-day qualifying stay to kind of figure out what the right run rate is for Medicare. I think there's got to be a little bit of margin of safety on that rate.

But I think what's often -- as we look at each individual asset, oftentimes, you can look at the specific Medicare rate, and each individual operator is going to be able to capture their rate a little bit differently. So based on the MDS, and based on the diagnoses of each individual resident, we sort of have an understanding of where the benchmark should be, and then we adjust off of that. So it's very specific to the assets, and it's in lockstep with our operators to understand certain buildings are going to get a certain type of acuity. Not all Medicare patients are the same. You're going to have -- in some communities, you can have patients that come in that are extremely clean, very healthy, that come in for maybe a stroke, and they don't have multiple comorbidities, while other pockets of markets can have patients that have a laundry list of diagnoses, and they're going to look very, very different under the MDS, which is the -- basically the input information that goes into billing the Medicare patients.

So really, it's getting with our operators and figuring out, kind of based on the building, based on the flow that they expect to get in terms of skilled patients, and then really kind of sharpshooting and dialing in on what that right Medicare number is. In terms of kind of rightsizing for the stepdown in PDPM, we take a look at that and kind of try to figure out what that rate looks like, if it's been cut by, say, 3% or 5% or 7%, just to see what that does to coverage to stabilize coverage.

There's other factors too. I mean what happens with Medicaid? And you have states that are looking at continuing to change their Medicaid rates. You have some states that are going from fixed rate to more of a CMI based acuity. So there's several things that go into it, but I think all things being equal, the important factor is getting shoulder to shoulder with the operators and walking through the assumptions, understanding what they're using for their Medicare rate, what they're using for their Medicaid daily rate, and then really looking at what the building is doing from an existing perspective and making sure that we can -- making sure the operator can bridge the gap and get to where they are projecting.

Okay. That's helpful. Maybe one quickly for you, Bill. On the ATM, your leverage going -- it was 3.3 now is 3.7. You 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 4 to 5. 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 that 4% to 5% target? Do you actually want to be under 4?

We like operating under 4%.

Jordan, it's Greg. I'll just tack onto that and tell you that if you look at what we just did, we were running like 3.3 in February, and we just spent $150 million and didn't break 4%. We really like that. And it's already ratcheting back down to the 3.7 range. And so we'll be ready for the next $150 million deal, should that come along. This just seems to be a very, very good place for us, for the investors we've spoken with, like it very much. And while we're not going to lower our target range of the 4 to 5x, so that we could do the $300 million, $400 million, $500 million deal if that came along, and we do have the capability to do that. We really are going to -- we really do intend to stay kind of where we are in the 3s.

That we have your next question from Daniel Bernstein with Capital One.

I guess I have a question on the CPI bumps. I noticed in your 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, reset within those leases. Are they reset quarterly, maybe what they're linked to? Just want to get a better idea of that?

Sure. Dan, it's Bill. The CPI bumps occur on the annual renewal date, so it's once a year. Some of the leases have caps on those on the CPI charge at a floor of 0. We moved it from 1.25% to 2% from the last -- from last quarter's guidance, mainly because we're seeing CPI increases north of 2% right now.

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 lease. So have you had any pushback from potential new tenants and deals that you're looking at and that people maybe want more of a fixed bump than the CPI bump?

Dan, it's Greg. No, we really haven't. Most of our operators really like CPI as opposed to fixed months because they feel like it tracks better with their overall expenses, labor costs, and everything else out there. And it just seems to be -- while you can't predict an exact number, it just 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 range that it won't go over. And as Bill said, most of them also are capped somewhere between -- for the Ensign leases, which were kind of semi arm's-length leases, they're capped at 2.5%. Other leases are capped at 3.5%. So as long as they've got the cap on there, and they can just go with the economy there. That's what they like, actually.

(Operator Instructions)

Okay. Well, it looks like we're done. Thanks, everybody, for being on. We hope to see you in NAREIT. Take care.

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