CareTrust REIT Inc (CTRE) 2022 Q3 法說會逐字稿

Good afternoon, and welcome to CareTrust REIT's Third Quarter 2022 Earnings Conference Call. After the speakers' presentation, we will conduct a question-and-answer session. To ask a question. As a reminder, this conference call is being recorded. I would now like to turn the call over to Lauren Beale, CareTrust's Senior Vice President and Controller. Please go ahead, Ms. Beale.

Thank you, and welcome to CareTrust REIT's Third Quarter 2022 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 FAD 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 Dave Sedgwick, President and Chief Executive Officer; Mark Lamb, Chief Investment Officer; James Callister, Executive Vice President; and myself, Lauren Beale. I will now turn the call over to Dave Sedgwick, CareTrust REIT's President and CEO. Dave?

Thank you, Lauren, and good morning, everyone. First, we'd like to excuse our CFO, Bill Wagner from today's call. Bill's brother very recently passed away, and Bill is spending time with family this week. On behalf of Bill, I would like to thank you for the many condolences and concern that has been expressed. We love Bill and pray for him and his family during this time. Now if I can shift gears, zooming out a bit to look at the big picture. Today's broader economic conditions bring both opportunities and challenges for our business. Historically, health care has been a hedge against recessionary pressures as demand for services is unaffected, while tight labor markets tend to loosen. Drilling down further to our market, highly levered buyers have been very active in our space for several years, and the tight debt market today has caused difficulties for those buyers and therefore, slowed some of our pending dispositions. But the flip side is that the rising rates are clearly tipping the scales in our favor on the acquisitions front.

We expect to continue to see an uptick in deals across our desk in the coming months. In October, we hosted our operator conference wherein we collectively address topics like overcoming the tight labor market, purchasing, reimbursement, the administration's policy proposals and more. We came away from that conference energized and [cautiously] optimistic about returning to growth in 2023 with who we believe are among the most elite operators in the sector. Each operator is unique, most are eager to grow with us, while some are still very much finding their footing as they continue to manage through historically tough operating conditions. We're deeply grateful for each of them and their tireless work to improve the lives of their staff, residents, patients and the communities they serve. We're also encouraged by the overall portfolio strength as we head into a new year that will likely see the eventual termination of the public health emergency. In our supplemental, we are reporting lease coverage on an adjusted basis, excluding assets held for sale. That coverage through June is just north of 2x for EBITDAR and 2.58x for EBITDARM. We collected 93.4% of rents, inclusive of deposits applied in the quarter, 92.5% excluding those deposits. More currently, in October, we collected 95.6% inclusive of deposits applied and 92.7% exclusive of deposits.

I'll conclude by acknowledging the great work done by the team here to close on the sale of the Trio skilled nursing portfolio in the face of several headwinds. Getting that deal across the finish line in September was a top priority for the company, and our team did a great job. Even after 30 months of the pandemic, this year's [bear] market and repositioning work, we have produced a 5-year total shareholder return of 22.2% through Q3. As we conclude the portfolio optimization work in the coming months, we will be poised to take advantage of increasing opportunities to grow as you become accustomed to with CareTrust. With that, I'll turn it over to James to update you on the portfolio and the quarter.

Thanks, Dave. As Dave mentioned, we were very pleased to have closed during the quarter on the sale of 7 facilities in Ohio at a purchase price of $52 million. The sale included 6 skilled nursing facilities and one multiservice campus totaling approximately 600 skilled nursing beds and 100 seniors housing units. As we sit here today, we have several dispositions progressing towards closing with target closing dates in the next couple of months. The majority of properties currently classified as held for sale, are under signed purchase agreements and in various stages of due diligence with the buyers. We are pursuing parallel paths of selling or re-tenanting several of the other properties held for sale.

As we weigh the alternatives for these properties, the common objective remains the same, to derisk the portfolio moving forward and efficiently allocate capital for the long term. Outside of the assets held for sale, we have entered into leases to reposition 2 of the seniors housing facilities to behavioral health and are entering into a lease to re-tenant 2 other senior housing facilities with a tenant that is a new relationship for us. While we had expected to complete most of the dispositions by year-end, the dramatically altered debt market has impacted many of our buyers. As interest rates have risen, we've seen many lenders continuing their [maintenance] sidelines as they consider industry headwinds in a looming recession. With lenders withdrawing, the process for selling to leverage buyers has slowed significantly. Nevertheless, we continue to see legitimate interest in our proposed dispositions, and we will continue to provide updates to you as deals further solidify and progress.

Also for the portfolio in Q3, we closed 2 real estate secured portfolio loans. In August, we closed on a $22.3 million BP loan secured by 5 California skilled nursing facilities. The loan is a [sulfur]-based rate with a floor of 8.5%. And in September, we provided a $24.9 million BP loan secured by 4 Georgia skilled nursing facilities. The loan is fixed to us at a 9% rate. Those recent transactions bring our 2022 year-to-date investment total to just under $170 million at an average yield of approximately 9%. With that, I'll turn it over to Mark to address the pipeline.

Thanks, James, and good morning, everyone. Looking to the market, we see increased interest rates, particularly from bridge lenders who are widening their spreads while tightening their underwriting standards, specifically increased debt yields and lower LTV and LTC ratios, which we believe these changes have been the drivers of an uptick in deal flow for us. Brokers and investment sales professionals are now commonly advising sellers to take certainty of close and we're maximizing sales proceeds, giving an advantage back to the well-capitalized buyers like us who do not depend on bank or debt fund financing to close transactions. We are seeing more actionable acquisition opportunities in markets that we and our operators are looking to grow in, they are going to achieve peak pricing that they could have received in 2021 and early 2022. It remains to be seen how long this period of price discovery lasts. The pricing in [inaudible] will have to transact at prices that are more reflective of historical cap rates and price per bed values.

We continue to work closely with our current operators and with some new operators we've long admired to underwrite and structure each of our acquisition opportunities to ensure the investment pencils for us and our tenants. Turning to the pipe. It currently sits in the $100 million to $125 million range. The pipe is primarily made up of skilled nursing and behavioral health assets at this time. We are seeing our standard one-off opportunities and also looking at some medium- to large-sized portfolios that may be split up amongst a few of our operators and in some cases, can be used to allow us to launch some new operators as we've probably done in the past. And with that, I'll turn it over to Lauren to discuss the financials.

Thanks, Mark. For the quarter, normalized FFO decreased 1.7% over the prior year quarter to $36.1 million, and normalized FAD decreased by 2.6% to $38 million. On a per share basis, normalized FFO decreased $0.01 to $0.37 per share and normalized FAD also decreased $0.01 to $0.39 per share. Rental income for the quarter was $47 million compared to $46.8 million in Q2. The increase of $200,000 is due to the following 2 items: one, an increase from CPI bumps of $394,000 offset by a decrease of $145,000 from cash collected from tenants who are on a cash basis of accounting; and two, a decrease in reimbursed property expenses of $36,000. Interest income was up $2.5 million due mostly to the loans we closed at the end of last quarter. Interest expense was up $2.1 million from Q2 due to a higher LIBOR rate, which accounted for most of the increase, totaling $1.6 million and higher borrowings under our revolver, which made up the remaining $486,000. During the quarter, we took additional impairments of $12.3 million on assets held for sale. Property operating expenses were $3.8 million for the quarter, primarily related to the sale of the facilities in Ohio, totaling $3.3 million, with the balance of $500,000 related to properties held for sale. G&A expense was up $181,000 from Q2 due to compensation-related items of $302,000 and offset by other corporate-related items of $121,000. I'm still expecting this year's G&A to be around $20 million.

Lastly, we recognized a $4.7 million unrealized loss on our loan portfolio. We have elected to account for our loans using the fair value option. As interest rates have risen since we placed these investments, the fair value has declined. I would like to stress that this is an unrealized loss and does not indicate that there will be any issue with collectibility of either interest or principal. Cash collections for the quarter came in at 93.4% of contractual rents and includes the application of $424,000 of security deposits. Without the application of the security deposits, cash collections was 92.5% of contractual cash rent. In October, we collected 95.6% of contractual rents due from our operators, but that percentage includes cash deposits. Excluding those cash deposits, contractual cash rents collected was 92.7%. We expect November collections to be similar to what October was with $0 coming from the application of security deposits.

Our liquidity remains extremely strong with approximately $19 million in cash and $405 million available under our revolver. Leverage also continued to be strong with a net debt to normalized EBITDA ratio of 4.2x, well within our stated range of 4 to 5 times. Our net debt to enterprise value was 30.6% as of quarter end, and we achieved a fixed charge coverage ratio of 5.9x. And with that, I'll turn it back to Dave.

Great. We hope our report has been helpful, and thank you for your continued support, and now happy to answer your questions.

If you -- we'll pause for just a moment to compile the Q&A roster. Our first question comes from Jonathan Hughes from Raymond James.

On the senior housing dispositions in progress, can you just remind us how much of those are paying and not paying rent?

Have we announced a breakdown of that in the past I don't think we have, Jonathan, so we'll have to address that probably on a future call.

Yes. Fair enough. All right. I guess moving to the portfolio then, could you just talk about -- you can give us maybe an update on Covenant Care, Bayshire and the Aspen portfolios, where EBITDAR coverage has either improved or stabilized, but it is below 1x. And are those all skilled nursing portfolios, maybe their locations and just any update or outlook on them continuing to pay rent?

Yes, you bet. So take Bayshire and Aspen kind of together, those guys are in our top 10, although we don't have a lot of buildings with them, because they've made up a -- The big acquisition that we did last year, those prime markets here in California, big campuses that there was some turnaround work that needed to be done when we acquired them. And it was in the midst of the pandemic. So we expected a bit of a ramp in coverage with them. What we're looking at here through June of last year  is inclusive of a lot of those early months of last year. And I'd say that as we sit here today, things are trending a lot better, particularly Aspen is making some great changes at one of those buildings that has been a little bit slower than the other and Bayshire we expect to continue to report increasing coverage on them. Aspen has a nice sized organization beyond the 2 assets that we have with them.

And very strong corporate credit and Bayshires, it seems like they are delivering already a little bit ahead of schedule on their turnaround plans there. So with those 2, we don't have any concerns about default. I think that they're going to continue to perform very well going into next year. Covenant Care has been through a change in management. The new CEO started there in June, and we're very close to those guys as well and are pleased to see the moves that they're making. We're expecting that coverage to increase in coming quarters, and we don't expect any problems with rent.

Okay. That's very helpful. Then I was hoping you could just kind of talk about your views on transitions or re-tenanting properties and the discussions between you and an operator, obviously, each situation and negotiation is a little different. But when those inevitably arise as they do within skilled nursing and seniors housing, how do you weigh CareTrust's economics and preservation of value versus bringing in other operator and setting them up for success?

Well, you're right. In your question, you stated a key point, which is that each deal is pretty unique. A lot depends on the existing relationship and the level of confidence that we have in the operator who is running the portfolio. At the end of the day, the math is simple enough that even I can do it, which is long term, what's the strategy that's going to preserve the most value for CareTrust while also being a sustainable win for that operator. So there isn't really a cookie cutter answer. We look at when there's a question on the table about an operator going sideways, we really look at all of the options from disposition to re-tenanting to cutting rent and keeping the operator to repurposing. Again, a lot depends on the existing relationship and confidence we have in the current operator. Whatever is going to lead to the greatest preservation of value going forward is going to be the strategy we pursue.

Okay. And one more just for me. The all other tenants bucket, that's about 10% of rents. You see EBITDAR coverage there is above 1.1x. It is great to see and I recall. Last quarter, there was an operator that actually had negative coverage that dragged it down. Can you maybe give us an update on that coverage for that negative operator and then coverage for the rest in that bucket as you did last quarter?

Sure. Yes. Thanks, Jonathan. Yes. We stay very close to that operator that's not in our top 10, but they're big enough to have a pretty big impact to that number. There's really no change since last quarter. If you exclude them from the number, that 1.11x coverage goes to $1.94, and total portfolio coverage goes to $2.11. The current contractual rent that through Q3, they're current on far exceeds what we would likely achieve from either re-tenanting or a recycling approach. And so we continue to be patient with them as they continue to pay rent and make progress on their turnaround plan.

Okay. And maybe what's the backing behind them? That's my final question.

They have a group of investors that continue to fund this turnaround strategy.

Our next question comes from Juan Sanabria from BMO Capital Markets.

Just hoping you could kind of reframe where we are in the repositioning either through asset sales or re-tenanting some assets? It seems like you've done 2 and going to 4. And if any of the assets have either fallen out of that pool or kind of -- What's the latest status on dollar value or number of assets that you expect to sell or transition just to give us a bit more breadcrumbs from a modeling perspective.

Yes. It's pretty fluid, as you've picked up on about half of the assets that are held for sale are right now under a purchase sale agreement that have dates either year-end or a little bit past that to close. Then the other half, we are a little bit more fluid than that as we're going down the parallel path of looking at re-tenanting versus selling. I don't think we've given any guidance on eventual value that we expect to get from that, particularly because it's a moving target as things fall in and fall out of those buckets. So that's where we're at.

And then on the pipeline, just curious on the yields we should expect for the $100 million, $125 million, correct me if that -- those numbers were mines I took the best notes there. And I don't think that included is get correct me if I'm wrong, but I thought that was seniors housing and behavioral. And if it doesn't, where do you see cap rates today really across the 3 major [flu] groups?

Juan, it's Mark. I would say the yields have obviously moved up. So it's starting the 10, mid-10s at this point for skilled nursing. On the behavioral side, it's somewhere between 9% and 10%. Then on the assisted side, it's, I would say, kind of mid- to low- 9s. We're obviously not looking at a lot of seniors housing at this point. I think in my prepared remarks, I said skilled nursing and behavioral, which is what we're pretty focused on right now, and the composition of the pipeline is made up predominantly of those 2 groups. So that's kind of where pricing is as we sit here today.

And then just one last one for me. Anything incremental on the balance sheet in terms of bringing down the floating exposure that you could do or want to do? Or at this point, it's kind of [with rates] have moved?

Yes. Juan, this is Lauren. About half our debt is floating rate debt. However, when we received the expected proceeds from the sale of the properties that are being marketed, that percentage is going to come down. We have looked at swapping to fixed rate on our term loan, but we don't like those rates when we compare it to the yield curve. So while it may be a bit bumpy for the next 6 months or so with regards to rate exposure, we feel comfortable with where we're at.

Our next question comes from Dave Rogers from Baird.

I was wondering if you could talk a little bit more about the discussions that you've been having with the potential buyers. Just more details on or have you only worked with kind of one buyer on each set of assets? Or have you had to -- Have you been retraded? If you had to go find more buyers to close? Then maybe just a second thought on that is given the tough financing market, given your floating rate exposure, have you thought about more seller financing on some of these transactions to get them closed and maybe hedge some of that floating rate exposure with floating rate loans out the other side?

Yes, I don't think I'll probably tell you anything you wouldn't expect to hear on those discussions with potential buyers. Given how much the world has changed since we kicked off this process back in Q1, it's just become tougher for them as lenders have kind of tightened up their requirements. And so it's not surprising to us or to anybody I think that potential buyers are coming back with extensions for diligence or different asks as they have. So that's kind of par for the course. It's the environment that we're in. We're not terribly concerned about it because we can always continue on and re-tenant or do whatever it is going to preserve the most value.

That's good. The second part of the math, I guess, any seller financing on the assets, anything you would consider along those lines to get more assets moved.

Yes. Yes. We'll provide that, if needed, to some degree, I mean, we don't want to get too heavy to that, but we'll be flexible to get stuff done that we need to get done.

Okay. And then maybe 2 cleanup questions for me. One, you got the Ohio sales done a little bit earlier, which was good to see. Did that just start earlier? And what was the yield on that? Or what would be the impact to you guys on that outside of the cash? And then the second question on the financing side, the deposits, you said, I think, in November, you don't expect to use any deposits or at least it's not in kind of the number. What are the deposits you have left remaining from the tenants that haven't paid or aren't paying fully?

We haven't reported the size of our deposits on hand. I don't have that handy, and that's not something we've disclosed in the past. With regards to the Trio portfolio, they were not paying rent at all this year. So, the immediate impact is paying down the line and then as we redeploy that, we'll see an uptick.

Our next question comes from Michael Carroll from RBC Capital Markets. Michael, your line is open.

Sorry. I was muted. I wanted to discuss the transaction market and see the differences that you're seeing on the skilled nursing facility side and the senior housing side. What we've heard is that the private market valuations for [SNIF] is actually holding up fairly well, while there's probably some more concerns on the seniors housing side. I mean, do you agree with that overall sentiment?

Michael, it's Mark. I would say I agree with the second part of that. I think certainly, we're seeing -- and granted, we don't see a ton of Class A senior housing. So what we're seeing is a little more kind of middle market. That certainly seems to be in a bit of a free fall. I think on the private market field nursing valuation side, I think that's actually -- A lot has changed in the last couple of weeks and kind of continues to move in our favor more and more every day. So I think those prices are starting to come down. Certainly, there is debt available, but it's not attractive enough for the valuations to stay propped up. I think, really, we're starting to we're seeing stuff come down almost daily in terms of where pricing was and the new expectations for either brokers or sellers.

Mark, how far away is, I guess, [SNF] valuations versus where CareTrust would be comfortable buying some of those properties? I know over the past few years, it's been well above your expectations. I mean, how much closer are those valuations compared to what you're willing to execute on?

I think it's going to be asset dependent as it always has with us. And we really look for low-hanging fruit on a specific asset. So over the last couple of years, we've been accustomed to buying buildings and assets that maybe have little to no cash flow but had enough low-hanging fruits in day 1 changes for ancillaries or insurance expenses to basically grow lease coverage fairly quickly within the first 90 days. I think it has a way to come down. I think certain states will probably stay propped up. I think the end of the public health emergency, I think will be the end of the line for a lot of operators. So I would expect at some point, mid next year to see, call it, more distress. But we're seeing a healthy amount of portfolios on the market right now that are losing significant dollars. If bridge lenders are somewhere in the 7 [inaudible] to today is probably 6.5 to 6.75% all in.

The spread is not there. So, you can't go high leverage on what -- from a bridge lending perspective. So really, REITs are in a pretty good position to kind of pick and choose what works for us and for our operators. I think we're probably -- My crystal ball is probably 6 to 12 months away from seeing pricing come down significantly to where, call it, asset economics kind of fit with the values. But that doesn't mean that we won't be acquisitive and look for specific assets that set our operators in their geographies where they have the best team in capital and leadership to turn those assets.

And how aggressive are you willing to be pursuing acquisitions? I'm assuming a lot of these assets that are on the market or turnaround stories. I know historically, CareTrust has bought a lot of assets and transitioned out the operators. I mean, how aggressive are you willing to do that? And are you willing to underwrite some pretty big upticks in EBITDA to make those deals work?

I'll take that one. This is Dave. Yes, I think we will be aggressive. I think that there's going to be so many opportunities in the coming months of operators that or facilities that have just lost their way, that if you bring in a new operator fresh leadership can really move the needle. And we can either watch that or participate in it. I think we have enough really capable operators who have a history of adding value and pulling the appropriate levers to both quality care and the employees and the culture and that translates down to the financial performance that you could see us doing some deals next year that might have a ramp for our operators for rent to give them some time to turn those buildings around. But again, like Mark said, we just take each deal separately and underwrite it to what it can do.

Okay. And then just last one, are you mostly focused on skilled nursing facility assets right now? I mean, would you pursue seniors housing properties, too?

Yes. Philosophically, strategically, we haven't written off seniors housing. We're simply seeing more skilled nursing today than we have in the past. Our bench candidly of operators is just deeper on the skilled nursing side today. So, we're open for business on skilled and seniors and behavioral health.

As a reminder, if you would -- Our next question comes from Steven Valiquette from Barclays.

Great. So this is kind of an age-old question, I guess. But just among your top 10 operators and probably some of the other ones as well. There are some where the rent coverage is sub-1.0 on an EBITDAR basis, but still above 1.0 in EBITDARM. It's always a little bit murky on the fees in between those 2 ratios and what is being spent on how much is truly cash versus noncash, et cetera. But maybe just remind us which sort of ratios you're more focused on. And while you talked about some of the individual operators that are sub-1.0r I mean are there any where you're not too worried about the tenant being able to pay rent because the EBITDARM coverage is still 1.0 even though EBITDA is sub-1%. Just kind of want to dive in that component of the ability to pay rent and just the nuances and the differences and the coverage ratios on some of these tenants.

Yes. Thank you. So the difference for us is we apply the standard 5% management fee to go from EBITDARM to EBITDAR so that everybody is viewed under the same standard lens. To your question about concern about paying rent, let me be clear that we really do not have any concerns about rent payments from our top 10 tenants in spite of a few of them being under 1x. Yes, the management fee can help. But in a bigger sense, the larger corporate credit is there. The momentum is also there in the dialogue and open transparent relationships that we have with them give us great confidence that they will continue to improve that coverage to north of 1x in short order. But generally, that 5% management fee is not completely used for back office, corporate services, and it does produce some extra cash flow for those guys. Every operator is a little bit different about how much of that 5% is actually used versus providing some free cash flow to them. So it's hard to really extrapolate.

Okay. That's helpful. I appreciate the color.

Last question comes from Austin Wurschmidt from KeyBanc Capital Markets.

Just wanted to touch on sort of the updated time line for completing sort of the portfolio optimization process. Is that still on track for year-end? Or could we see it bleed into 2023?

Yes. Like we said on the call and in the script, we have about half of it that has signed PSAs. Most of that has target closes for the end of this year. But given the market that we're in, it's pretty fluid, and we could see some of that push into next year.

Would you guys expect by fourth quarter results to be able to provide 2023 FFO guidance?

We hope so, but we'll have to determine it depending on the timing of these dispositions.

Okay. Then I just wanted to touch, it looked like one of the assets fell out of the pool of repurposing opportunities this quarter. I think it went from 3 down to 2. Could you just kind of give additional detail as to what [of that]?

Yes. During the diligence process for licensure for the behavioral health property in that particular market, the time line to repurpose that was determined to be a lot longer than our operator had originally expected. So that caused us to revisit the issue and we mutually agreed that it would probably make more sense for us to just re-tenant that as opposed to agree to a much longer time line before receiving rent on that property.

Understood. And then, Dave, on your comments in the release around occupancy trends, were those updated specifically for the third quarter? Should we -- Should that signal coverage levels have bottomed? Or could expense headwinds continue to offset some of those occupancy gains?

Yes. So the occupancy is to the third quarter. Just remember that when we give occupancy numbers that are at real time, they can fluctuate a little bit as the actual financials come in. Going forward, as it relates to coverage, there's a lot of variables in play right now, from, skilled mix to overall occupancy and what the labor market looks like as the recession takes hold. So it's pretty tough to look in a crystal ball right now, but hopefully, we'll have some more clarity on that in the next quarter.

And then just last one for me. We've kind of covered a lot on the acquisition pipeline, but I'm just curious if those new deals that you're evaluating, like do you plan to kind of dig in further, I guess, in those top 5 states that you're concentrated in? Or are these broader opportunities where you could gain scale within some of those states where you have much less exposure?

Yes. We're open to grow wherever we have an operator that we'd like to partner with. There are certainly going to be exciting opportunities, we think, to expand existing relationships in existing geographies, but we're also nurturing several relationships with new operators that we hope to enter into agreements with in the coming year.

We have another question from Tayo Okusanya from Credit Suisse.

Questions specifically around Ensign as a top tenant. Again, you've kind of entered this relationship with Sabra, and it's kind of interesting because not that long ago to were just kind of talking purely about their captive REIT. So I'm just kind of curious, again, when you kind of see what's happening with Sabra, does that change any way how you kind of think about your relationship with Ensign? Does that make you not feel like there will be more opportunities to work with them going forward rather than less?

No. I think I don't think that their announced deal with Sabra affects our relationship in any capacity in any way. We've got a great relationship with those guys and are big fans of the quality of their work. We expanded our relationship with them last year, if there's opportunities to do that. Going forward, we absolutely will.

Okay. And I guess I can just clarify, like I just thought they were kind of going towards building their own REIT. It was kind of interesting for them to kind of decide to be a tenant again for a bunch of assets. That's kind of what I was curious about.

Yes. No, I think they've always prioritized acquiring real estate before [their] CareTrust spin-off and since their CareTrust spin-off, and I think they would love to do that still. But even with that preference, if you look back, they have done a lot of leases at the same time. So I think the thing about Ensign is they are very disciplined in their growth and the opportunities that they pursue, whether and they found the ability to be disciplined growers both through real estate and leases.

Got you. Okay. That's helpful. And then, Dave, if you could just indulge me again, your commentary generally today sounded cautiously optimistic, which is great to hear. But you're also kind of hedging that a little bit, if I may use those words with environment, is still somewhat uncertain. So I guess, what kind of data points specifically are you looking for over the next 1 to 2 quarters to truly feel like things have turned.

I'd say that we want to -- we really want to see agency, third-party temporary agency usage come down in a meaningful way in those facilities. The best, I'd say, sign of stability for an operator is to have essentially no third-party temporary agency staffing. Not only is it expensive, but it is a detriment to the quality of care and culture within any facility. So while those remain high, it's going to be a little bit of a constraint on both occupancy growth and just a return to kind of more of a prepandemic feel.

Got you. Thank you.

We have no further questions. I would like to turn the call back over to CareTrust's CEO, Dave Sedgwick, for closing remarks.

Well, thank you again for your continued support. We'll see some of you at [nearly] next week. If not, you have any questions, you know where to find us. Take care.

This concludes today's conference call. Thank you for your participation. You may now disconnect.