Caretrust Reit Inc (CTRE) Q3 2021 Earnings Call Transcript

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Caretrust Reit Inc (CTRE 0.94%)
Q3 2021 Earnings Call
Nov 8, 2021, 2:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the CareTrust REIT's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today Lauren Beale, CareTrust's Senior Vice President and Controller. Thank you. Please go ahead.

Lauren Beale -- Senior Vice President and Controller

Thank you and welcome to CareTrust REIT's third 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. Earlier this morning, 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 Operating Officer; Bill Wagner, Chief Financial 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?

Greg Stapley -- Chairman and Chief Executive Officer

Thanks Lauren and good morning, everyone. Last quarter, we were concerned about the near-term effects of the rising wave of the Delta variant infections and the possibility of a stall in the census recovery that was just getting underway. Fortunately, those concerns were short-lived and we can report the occupancy gain steadily continued in most markets with a few facilities actually having fully recovered in census.

While we're still far from pre-pandemic occupancy overall, the continuing trajectory of the census recovery is consistent with our expectations so far. These gains on the census and revenue front are welcome news, but only half of the equation. The shortage of qualified workers and the sharp rise in labor cost is a growing challenge, especially as patient and resident census rises. Several of our tenants report turning some patients away simply because they lack the necessary staff to care for more. In spite of the challenges still facing both the skilled nursing and seniors housing industries, pricing for assets and skilled assets in particular, has been unusually strong.

As Mark will explain more fully in a moment, our disciplined underwriting approach is dictating that we forgo some opportunities while we wait for pricing to rationalize. When that happens, and it always does, eventually, we expect to benefit from having lots of dry powder on hand. We believe that the value of that discipline is more evident than ever in our portfolio today. With the exception of one small short-term deferral, our tenants have been able to pay their rents right along this year despite the effects of the pandemic. And while the industry is not yet out of the woods, I would be remiss if I did not note, for the record, that we do see some encouraging indicators of strength emerging in our portfolio, independent of the provider relief. Dave will talk more about that in just a moment.

That said, we're very pleased with the quarter. We posted double-digit normalized FFO growth of 13% over the same quarter last year and normalized FAD growth of 15.1%. We collected 96.2% of contract rents in Q3 and 96.1% thus far for October, with the shortage being the one deferral that we disclosed last quarter, which we still expect to collect by 12/31, to bring us to 100% of rents due thus far this year.

We grew the portfolio with $32.5 million in new investments in the quarter, bringing our total capital deployment this year to over $184 million, and if things come together as planned, we're maybe not quite done. We paid down a revolver following the acquisition and held leverage steady at a comfortable net debt-to-EBITDA of 3.7 times at quarter end. And as Bill will discuss in a moment, we are raising our 2021 guidance today.

To cap it off, we got together with most of our operators last month at our annual operator conference, which was held in person here in Laguna Beach. I think it left everyone who came really invigorated and better prepared to tackle whatever comes next. So we are constructive on the long-term future of our portfolio, and CareTrust remains well positioned to continue pursuing our mission of pairing great operators with meaningful opportunities to transform individual opportunities for the better.

With that, I'll turn it over to Dave. Dave?

Dave Sedgwick -- President and Chief Operating Officer

Thanks, Greg, and good morning, everybody. Let me begin this quarter by thanking all of our skilled nursing operators for joining us at our recent annual operator conference that Greg just mentioned. Speaking for all of us at CareTrust, bumping fists, hearing real-time updates from Mark Parkinson of the American Health Care Association and sharing best practices for a few days was incredibly energizing and informative. We're so proud of our association with a group of operators that we consider to be among the best in the country.

In the conference, we spent a lot of time sharing what's working best to address the current COVID and labor challenges. Virtually, all of our operators agree that their occupancy recovery has slowed because of tight labor. The flip side of that is that our operators-is for us and our operators is that the question at the beginning of the year about SNF demand has been answered. Demand is high, and the recovery would be much further along, if not for the tight labor market.

Nevertheless, we are seeing some operators and some facilities hitting either record occupancy numbers or close to them. We continue to be impressed by those who are managing this latest challenge well. Let me share with you just a few examples of the progress we're seeing and hearing in the portfolio, what Greg just referred to as some encouraging indicators of strength. Ensign, our largest tenant, reported four sequential quarters of occupancy growth and enjoys lease coverage north of three times. We cannot overstate how exceptionally well they have performed through this pandemic.

Priority Management Group has grown its occupancy 6.7 percentage points since its low in December. Eduro has improved its coverage during COVID, excluding all provider relief funds. Trillium has slashed agency costs by over $400,000 a month since the summer, and staff turnover from 60% down to 20%. Trio Healthcare has vaccinated 100% of its employees and is nearing record high occupancy and skilled mix.

Covenant care slashed agency usage from a February high of around $1 million a month to under $100 a month right now. And momentum created a special secure unit to accept on care for the large county hospitals difficult-to-place patients, growing occupancy and earning some valuable goodwill with their referral sources along the way. Occupancy is 13.5 points higher than last summer. I could go on. These are the types of successes that we don't get to read about in the news, but are happening throughout the portfolio.

Again, let me say thank you to all of our operators and their teams for the extremely heavy lifting they've been doing these last 21 months. These positives don't mean that many of them won't need or benefit from the next round of provider relief funding. We believe all of our operators have applied for Phase IV, except for Ensign and Pennant who have not needed or accepted relief funds from the beginning. We'll find out how much the Phase IV funds extend the runway for each operator as funding amounts are determined and checks are received in late November and December.

But it's great news for our operators, skilled and assisted living alike who have needed those funds so far. Occupancy growth will also be critical. In Q3, our skilled nursing operators reported continued occupancy recovery from the prior quarter, resulting in a projected return to pre-pandemic levels sometime next summer. While just under 20% of our skilled nursing facilities are still operating below 80% of their pre-pandemic occupancy, the majority, almost 60% are back above 90% of pre-pandemic occupancy.

And on the skilled mix front, the Delta surge appears to have actually given a balance to some of our operators in the regions most affected. Overall portfolio skilled mix remains about 300 bps higher than the pre-pandemic levels, with the higher reimbursement rates that offset some of the overall occupancy loss. Of course, this projection assumes that qualified labor is available and that no new headwinds such as a new variant or wave of infections intervenes.

For seniors housing occupancy, overall occupancy and our relatively small AL portfolio, remains unchanged from Q2 in spite of the fact that admissions are significantly up. The treadmill here with AL occupancy is really a result of one of our operators electing to discharge a host of residents for various reasons. Now that that's largely done, we expect to see our seniors housing occupancy begin to recover more quickly from here on.

Turning now to lease coverage. With few exceptions, overall coverage remains very healthy, both with and without provider relief funds. A couple of our operators have really needed those funds to extend their ability to survive and ultimately recover from the impacts of COVID. Our top 10 operators coverage, which accounts for over 80% of revenue continues to be strong at 2.2 times for property level EBITDAR and 2.76 times of EBITDARM.

Our relatively transparent coverage disclosure will prompt questions around individual operators. So let me go ahead and address three of them right here. First, last quarter, we talked about Noble Senior Services, one of our seniors housing operators and their request for some flexibility in paying a few months of rent. You will have noticed both the investment total and rent numbers increased for Noble since last quarter. That is a result of transitioning the second of two premier facilities to Noble in Wisconsin.

Around this time last year, we began talking to Premier about transitioning their two Wisconsin facilities, which were outliers for Premier. Noble's top-performing facility was nearby. And at the time, again, last year, Noble as a whole was performing a little bit ahead of their expectations in spite of COVID. We saw this transition as a win-win for both operators. The two buildings transitioned this year, the first in March and the second in July, as regulatory approvals were required and took some time.

We're happy to report that Noble's admission rates have really picked up lately. But as I noted a moment ago, their discharge rate has also been unusually high primarily due to an internal review that led to discharging a number of residents that were not best served in their settings. These discharges represented 12.5 percentage points of their overall occupancy. We think that's essentially done now. But of course, it's left a significant hole in their near-term revenues. They hadn't received provider relief funds previously, but they have applied for and expect Phase four assistance. So in September, we agreed to defer approximately 90 days of rent under an arrangement for them to pay it all back, plus the rest of their 2021 rent, by the end of this month. Their obligations under the agreement will be funded from their proceeds of our pending acquisition of their two memory care facilities in New Jersey.

That arrangement, which is only dependent now on the imminent receipt of regulatory approvals, appears to be on track. After that, they still have a ways to go to get to positive lease coverage, but the Phase four provider relief funds and other government assistance will be immensely helpful in the meantime. And perhaps, more importantly, for the long-term, as I noted, we believe that the discharges are over now, and with the increasing pace of admissions, their occupancy number should finally get some traction.

Second, Covenant Care is a SNF operator whose month-over-month occupancy and coverage is actually trending really positively in recent months. We're in a minority -- we're a minority piece of their overall portfolio and the corporate credit is very good as their other facilities are reportedly performing well. We're optimistic that their recovery trend will continue. Finally, let me talk about Bayshire Senior Communities, their seniors housing and skilled nursing operator that took over two of the four beautiful large campuses in California we acquired early in the year, plus another in El Centro, California.

The Bayshire team has a positive momentum in those three assets, and we expect them to near stabilization soon. So we remain very constructive on both the near and especially the long-term prospects for our skilled nursing and seniors housing portfolio. The combination of steadily recovering census and continuing relief funding, especially for the AL operators, bodes well for them. Even though it's no guarantee of success for the most challenged, we will continue to monitor and report.

With that, I'll pass the call over to Mark to talk about investments. Mark?

Mark Lamb -- Chief Investment Officer

Thanks, Dave, and good morning. In Q3, we executed on a $32.5 million acquisition of two skilled nursing facilities in Austin, Texas that we concurrently leased to operating affiliates of the Ensign Group. The two assets are well located and practically brand new, and it will be exciting to watch Ensign ramp them up over the coming months. The acquisition brought our total investments in 2021 to $184.2 million.

From a market perspective, on the skilled side, we continue to see one-off deals with mostly non-strategic and struggling facilities. As you would guess, deal flow for stabilized assets has been very light, as stabilized assets are understandably harder to come by for the moment. And with respect to value-add assets, the ongoing government support of the SNF industry has kept some owners afloat, owners that we would have normally seen selling their assets as property level economics turn negative, while they deal with challenges of reduced occupancy and higher labor costs.

So with stronger-than-usual demand for fewer than usual assets on the market, pricing for skilled nursing has surprisingly spiked, just when you thought there might be a pivot discount. In fact, on a price-per-bed basis, SNFs have been trading at all-time highs, including many assets with little to no cash flow. In other words, yes, Virginia, there is a Santa Claus for SNF sellers this year. Seniors housing is its own story. There's a large range of assets on the market from Class A to Class F and everything in between. A lot of those assets appear to be mispriced as well.

Although we have seen a few more reasonable numbers for the mid-market product that we typically pursue, we are looking hard at some opportunities where we think we can get risk-adjusted returns no customer has seen from us. I would remind everyone that we've consistently reassured the market that at any point in the real estate cycle, where pricing becomes unsustainable, we would stick to our underwriting discipline to ensure that we keep our portfolio healthy and well positioned for the long-term coverage growth.

So we continue to tap our extensive industry contacts for appropriately priced opportunities, which is why we've been able to close $184 million in largely off-market deals year-to-date. And as Greg mentioned, there may be more before the year is done, but we will not chase mispriced assets or place our tenants in untenable situations, where their rents and the annual escalators will erode their lease coverage to a point that is unsustainable.

Looking to 2022 and 2023, the investment sales community continues to express an expectation that a wave of deals will be coming to market, based on the record number of broker opinions of value, or BOVs, they're being asked to issue by prospective sellers. We can't predict exactly when, but we expect that pricing will eventually settle as the pandemic subsides, supply chain issues resolve, interest rates rise and credit standards inevitably tighten.

In that environment, we'll be ready to use our consistently conservative balance sheet to grow more aggressively with quality assets in good markets and above all, with best-in-class operators. In the meantime, we continue to eye every deal out there for opportunities that might fit us in our operator partners. And we believe we'll get our fair share of them. Our current pipe sits in the $125 million to $150 million range.

The pipe is made up of singles and doubles, with a couple of solid smaller portfolio opportunities that we believe are a good fit for our operators. The pipe is split roughly evenly between SNFs and senior housing facilities. Please remember that when we quote our pipe, we only quote deals that 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.

Bill Wagner -- Chief Financial Officer

Thanks, Mark. For the quarter, normalized FFO grew by 13% over the prior year quarter to $36.7 million, and normalized FAD grew by 15.1% to $39 million. On a per share basis, normalized FFO grew by 11.8% over the prior year quarter to $0.38 per share, and normalized FAD grew by 11.1% to $0.40 per share. Moving on to guidance. We plan on issuing guidance for 2022 when we release 2021's year-end results. For the remainder of 2021, we are raising our previously released guidance by $0.01 on the low-end of the range to normalized FFO per share of $1.49 to $1.50 and normalized FAD per share of $1.58 to $1.59.

This guidance includes all investments and dispositions made to date, share count of 96.5 million shares and relies on the following assumptions: one, no additional investments, dispositions or rent deferrals cuts 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%, a total rental revenues for the year, again, including only acquisitions made to date are projected at approximately $186 million, which includes less than $40,000 of straight-line rent; three, interest income of approximately $2 million; four, interest expense of approximately $23.8 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 the interest expense was a $10.8 million charge that we recorded in Q3 related to our Q2 bond refinancing. The $10.8 million was 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 consistent with what we discussed last quarter.

Our G&A projection also includes roughly $7 million of amortization of stock comp. Our liquidity remains extremely strong with approximately $23 million in cash, $520 million available under our revolver, and we produced roughly $12 million in cash per quarter after paying the dividend. Leverage also continues to be strong at a net debt-to-normalized EBITDA ratio of 3.7 times today. Our net debt to enterprise value was 25.1% as of quarter end, and we achieved a fixed charge coverage ratio of 8.5 times. Lastly, cash collections for the quarter came in at 96.2% of contractual rent, and October came in at 96.1%. I would expect November to be much like October based on the color given today on this call. As Greg mentioned, we do, however, expect to collect this shortfall before year-end.

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

Greg Stapley -- Chairman and Chief Executive Officer

Thanks, Bill. Everyone, we hope this discussion has been helpful for you. We certainly appreciate your continued interest and support.

And with that, we're happy to open it up for questions. Sade?

Questions and Answers:

Operator

Yes, sir. [Operator Instructions] For our first question, we have Juan Sanabria from BMO Capital Market. Juan, your line is open.

Juan Sanabria -- BMO Capital Market -- Analyst

Hi. Thanks for the time. Just hoping to spend a little bit more time on Noble. The two assets that you guys are moving, just curious on if those were EBITDA negative and/or coverage enhancing for Noble? And/or is the rent that's staying with those assets staying in place with Noble? Or just curious on how we should think about that and/or the risk for rent on those two assets being lower than what was subscribed to it under the prior lease? Just a little bit more color on that piece would be helpful.

Dave Sedgwick -- President and Chief Operating Officer

Yes. The buildings were not covered. So they were under one times coverage. We're sort of chronic underperformers for Premier. And one of the things we really liked about putting them into Noble's hands last year, when we were looking at it, was that Noble's, so their top-performing facility is in Wisconsin, nearby to these two Premier assets, their strongest local leader and most consistent operator.

So this created the opportunity for them to build on that strength, form a nice little cluster. And we felt like it gave those two buildings a better chance to get back to stabilization than they were, and Premier agreed. So the rent came over at the same amount to Noble. But there's some work to do there to get those to be performing. Since the transition happened, they have, under Noble's care, improved slightly on a coverage perspective, but they still have some ways to go to get to north of one times coverage.

Juan Sanabria -- BMO Capital Market -- Analyst

Okay. And just to clarify, there's not assets being taken out from Noble to be given to a new operator? I was just reading over the 10-K, and I was a little confused about maybe another two groups of assets. Or are those the same two assets?

Dave Sedgwick -- President and Chief Operating Officer

Yes. So there's two groups of two assets. So I understand why there's some confusion. The reason why I talked about these two Wisconsin buildings that were added to Noble is to address the question of why Noble has actually increased in investment size and rent in terms of our relationship with them. And it's because of that, because they took over those two assets from Premier that we started negotiating last year and then has finally -- took place this year.

The other two assets that we've been talking about for Noble, one is a building in Fort Myers, Florida, which has been off-line since they stepped into the lease back in 2019 for major renovations and getting that back ready to go. That's still a ways out from being ready and licensed. The other one is a building in Baltimore, Maryland, that's actually being actively marketed right now for sale. So those are the -- probably the other two buildings that you're thinking about from the Q.

Juan Sanabria -- BMO Capital Market -- Analyst

And so once those buildings are carved out, is that coverage-enhancing? Or do you have a sense of what the pro forma coverage would be just to give us a pro forma-type number?

Dave Sedgwick -- President and Chief Operating Officer

I don't have a pro forma number at my fingertips, but absolutely, when Fort Myers is removed and Baltimore is removed, those will be significantly coverage-improving for Noble.

Juan Sanabria -- BMO Capital Market -- Analyst

Okay. And then just switching gears to the pipeline. What gives you the confidence, I guess, that prices won't stay where they are, cap rates lower or price per units high, in that we've seen significant cap rate compression in other asset classes with low rates, and who's to know where interest rates go.

So just curious if -- on what you see changing or what you think you're not willing to match versus some of the other buyers out there in terms of underwriting. Is it just the speed of the recovery? Or is it the underlying value of the assets that may or may not change? Just curious, if you could provide a little bit more color on that.

Mark Lamb -- Chief Investment Officer

Well, I think -- this is Mark. I think just talking to the investment sales community and understanding that, eventually, the spigot's going to get turned off. So I think we feel like pricing, at some point, will rationalize. And so I think, over the next probably 12 months, we'll start to see more and more opportunities. So am I answering your question? Is your question why we think pricing will go south?

Juan Sanabria -- BMO Capital Market -- Analyst

Yes. Why will it normalize and/or where are you different, I guess, in the underwriting versus the people who are winning the bids? Is it just they're more aggressive on the time line of a recovery or just have -- are placing a greater value on the underlying real estate and ops?

Mark Lamb -- Chief Investment Officer

I think it's -- I think the folks that are winning bids, I think, are making some assumptions on certain states, specifically states that have CMI-based Medicaid rates and are assuming pretty aggressive increases in Medicaid rates. And that's not something that we're necessarily willing to underwrite going in the door. What operators can do day one, whether there's certain insurance costs or kind of very easy low-hanging fruit day one and just we'll take into consideration. But betting on an operator to increase their CMI, which then increases the Medicaid rate, which would increase coverage, there are some nuances to that, that don't give us a whole lot of comfort, and there are operators that are willing to take that risk and move off of those assumptions.

Juan Sanabria -- BMO Capital Market -- Analyst

Thank you.

Operator

And for our next question, we have Jordan Sadler from KeyBanc Capital Markets. Jordon, your line open.

Jordan Sadler -- Analyst

Thanks and good morning, guys. So I wanted to just dig in a little bit more on Noble. Dave, it seems like there's a third group of two assets, which are the two assets that you'll be purchasing in New Jersey, the memory care assets, just to make matters more confusing for the payer. Can you give us a little bit more color on those two assets and how that transaction is going to come into the fold, how much -- so maybe how much you'll be paying and what the valuation will be?

Dave Sedgwick -- President and Chief Operating Officer

Yes. So those two assets are owned by Noble. There's just some regulatory -- one last regulatory hurdle to pass, and then we can execute that purchase, which we think will do in this month, if all goes according to plan. Those are two about 40, 45-bed facilities for memory care in New Jersey that have been empty for quite some time, being renovated. They have been renovated. We'll probably, once we acquire them, put a little bit more into it, to get them really beautiful and ready to go.

The process in New Jersey takes a little bit longer than other states to get licensed once you have Certificate of Need. So we're likely going to start collecting rent on that sometime in first half of next year, hopefully, first quarter. But sometime in the first half of next year, we are likely going to have a different operator run those than Noble.

We are currently marketing the facilities, having really good conversations with a host of interested operators. We're going to be touring the facilities with them soon. And we have some time because of licensing to get that lined up, but there's been a lot of interest in them for operators that are already in and around New Jersey. The purchase price on that is around $12 million for those two buildings.

Jordan Sadler -- Analyst

And then you'll put in how much additional?

Dave Sedgwick -- President and Chief Operating Officer

TBD, but probably under $0.25 million.

Jordan Sadler -- Analyst

Small amount, OK. And then those will be leased to somebody else at a yield that we would expect typically from you guys?

Dave Sedgwick -- President and Chief Operating Officer

Yeah. That's right. Most likely. But because they're empty, there's going to be a bit of a ramp in that rent. So once they get stabilized, then we'll land at that normal yield that you expect from us.

Jordan Sadler -- Analyst

Okay. And then just clarifying on the two that are -- well, Baltimore and Fort Myers, it sounds like Baltimore will be sold curious there, what the sale price might be and then how the debt credit like what the rate credit would be on a yield basis relative to the value back to Noble. And then -- maybe if you could clarify what's happening with Fort Myers?

Dave Sedgwick -- President and Chief Operating Officer

Yeah. So with Baltimore, we will find out what the market says about the price for Baltimore. I don't want to -- I don't want to whisper a number to the market, while it's been actively marketed at this time, but we will take that -- those proceeds and hit it with kind of -- a and expect -- what you might expect a rent yield to be for that and adjust the rent accordingly.

And Fort Myers, there have been some -- since that building went through a full renovation as it's gone through licensing with the fire authority they've discovered some shortcomings that they'd like us to shore up before we reopen it. And they're pretty extensive. And so that's what's caused the delay there. But we have our Director of Construction Services has been boots on the ground there, very recently talking face-to-face with their fire authority in collaboration with Noble to try to move that along.

Jordan Sadler -- Analyst

Okay. That's helpful. Last one, maybe get Mark in the conversation here. It sounds like you're not closing the door on the $250 million to $300 million of acquisitions you guys have done historically, a little bit of a ways to go. Is that the right cadence we should be coming away with?

Mark Lamb -- Chief Investment Officer

Yeah, I mean it's obviously getting late in the year. I mean I think what we have teed up in the pipeline, I don't think it's going to get us quite maybe the historical number that you saw pre-COVID. But what we do have in the pipeline, we're pretty excited about. And so just be a function of how quickly we can get through diligence and get operators signed up.

Jordan Sadler -- Analyst

Okay. Thank you.

Operator

For our next question, we have Amanda Sweitzer from Baird. Amanda, your line is open.

Amanda Sweitzer -- Baird -- Analyst

Great. Thanks for taking my question. Hopefully, a last follow-up on Noble here, but do you know if Noble currently has any debt against the two assets, that you're acquiring that they need to pay off? Or should we really think about that purchase price for those assets as a one-for-one cash infusion for Noble?

Dave Sedgwick -- President and Chief Operating Officer

They have some debt that will be paid off from the proceeds. And the largest amount of the proceeds will go toward paying off the deferral and prepaying rent and other obligations for us.

Amanda Sweitzer -- Baird -- Analyst

Okay. That's helpful. And then, on staffing for the operators that you mentioned where you are seeing those lower agency costs. Are you also seeing less occupancy restrictions? Or are those operators generally trading agency labor for full-time staff? And are still then facing staffing constraints overall?

Dave Sedgwick -- President and Chief Operating Officer

So thanks for asking, because I think it gives me a chance to correct something. When I was talking about Covenant Care, somebody -- I was nudged here at the table that said I said that their costs went from $1 million a month down to $100 a month, but that's really $100,000 for Covenant Care. So, as it relates to our operators in general most of them are saying that, there is some limitation on how much they -- for the skilled side, not so much for the senior housing side. But for the skilled side, how much they mean, because of tight labor. There's really two ways to approach that.

You can continue to admit and staff with agency, which takes a big cut to your margin. Or you can stay with lower occupancy and keep agency out. We have operators that are basically approaching it in both of those ways. And there's, pros and cons to both of those approaches. So I'm not sure if that answers your question, but that's how they're approaching it now.

Amanda Sweitzer -- Baird -- Analyst

No. That's helpful. And then, last question, finally up on your senior housing portfolio and kind of improved trends you're seeing there. Can you quantify how big the occupancy up-tick is that you've seen quarter-to-date?

Dave Sedgwick -- President and Chief Operating Officer

Unfortunately, I can. Seniors housing occupancy quarter-to-quarter really has remained flat.

Amanda Sweitzer -- Baird -- Analyst

I appreciate the time.

Operator

And for our next question, we have Michael Carroll from RBC Capital Markets. Michael, your line is open.

Michael Carroll -- RBC Capital Markets -- Analyst

Yeah. Thanks. Dave, can you go back and talk a little bit about the internal review that you're highlighting about Noble. I guess, what drove that internal review? And where were those residents, where did they move to? What was the better setting?

Dave Sedgwick -- President and Chief Operating Officer

Well, I think this -- the overall concern was appropriateness of care. So in other words, there's really kind of two things that led two pools of concern. One was appropriateness of care. And the second was payer source. So it's one thing to admit residents, but if they aren't able to pay over time, then you have a problem and you kind of have phantom revenue there. So that was an issue. And the other was just the appropriateness of care most common around either acuity, or behavior, things like that.

So there was -- what prompted it was management finally coming to grips with some lingering issues and taking a hard look at what they had in a handful of their facilities, really a couple of their buildings, where they had kind of persistent problems. And as they dug into it, they realized that there were collection issues, and those collection issues were not unrelated to some of these behavioral issues as well, and finally, just made some policy decisions around the types of residents that they can really appropriately take care of.

Michael Carroll -- RBC Capital Markets -- Analyst

So that 12.5% drop, was that how many communities with -- and I guess, out of how many within their portfolio? And were they moved to what behavioral health facilities or skilled nursing facilities or those types of assets?

Dave Sedgwick -- President and Chief Operating Officer

They would be. I didn't -- we didn't really keep track of where they went. So I couldn't give you specifics on what percent went where. But you're right, that's where people would go or other assisted living facilities that specialize in behavioral-type health as well. So within seniors housing, you have all sorts of specialties. And the buildings that they had just didn't have that capability to take care of that population. It was concentrated at a couple of the buildings.

Michael Carroll -- RBC Capital Markets -- Analyst

And that 12.5% occupancy drop, that was at the whole portfolio or just select buildings?

Dave Sedgwick -- President and Chief Operating Officer

Their whole portfolio.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. So where is occupancy at for Noble for their portfolio today?

Mark Lamb -- Chief Investment Officer

We can get back to him once we...

Dave Sedgwick -- President and Chief Operating Officer

I might have to get back to you on that one, Mike.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. That would be helpful. And then can you talk a little bit more about Premier? I mean I know their coverage ratio has been pretty low over the past few years. I mean moving those two assets to Noble out of that portfolio, where does coverage ratio go? Is it closer to one times?

Dave Sedgwick -- President and Chief Operating Officer

Yes, it is. It's creeping up. We've been receiving -- we just saw Premier at a conference this last week, had a really good conversation with them, have a good relationship with those guys. They're starting to see some traffic pick up in their Michigan portfolio. They expect more move-ins, net increases by the end of this year. They have applied for the Phase four funding and rural funds as well. So things are actually a little bit better and stronger at Premier today than they have been in a long time, and removing the two Wisconsin facilities has helped that.

Michael Carroll -- RBC Capital Markets -- Analyst

So when you say it's moved up a little bit, I think it was around 0.8 times last quarter. And obviously, they fell out of your top 10. So I don't believe it's in this most recent report, but is it back up to 0.9 times? Or how much is -- does that removing those two assets really help them? And can we take them off the watch list? Does it help them that much?

Dave Sedgwick -- President and Chief Operating Officer

No, I don't think we're going to probably take Premier off the watch list until they're comfortably north of one times. And they still have a ways to go. I think their coverage in the quarter was fairly consistent with what it was the quarter before, maybe a little bit down. What I was referring to is more real-time information that we have. In Q4, just looking at their occupancy and talking to them about their costs, we expect that it's starting to creep up right now.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. And then just my last question for Bill. Can you talk a little bit about the CPI rent escalators within the company's leases? I believe you have 2% in guidance, and CPI has been well ahead of that. I guess what CPI should we typically look at for those? And is it above 2%? Or is that really going to be a 2022 event versus 2021?

Bill Wagner -- Chief Financial Officer

Yes. Hey, Mike, CPI, most of our leases contain CPIW and CPIU. It is -- for the last few and as you know, our leases contain floors of zero in caps. Most of them have caps. Ensign's capped at 2.5% and CPI came in for them above 2.5% on June 1, but we still raised them by 2.5%. The other caps go up to like, I think its 3.5%, and CPI has been well above 2.5%. So they -- so our assumption of 2% in guidance for the rest of the year, which we only have a few tenants with bumps in Q4 isn't really material if it goes from 2% if I use 2% or 2.5% or 3%.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. So if we look into 2022, it's safe to assume that we're probably closer to that 2.5% range given where CPI has trended?

Greg Stapley -- Chairman and Chief Executive Officer

Correct. Yes.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay, great. Thank you.

Operator

For our next question, we have Steven Valiquette from Barclays. Steven, your line is open.

Steven Valiquette -- Barclays -- Analyst

Hello, everybody. Thanks for taking the question. Actually, a couple of questions here really on the decision by Ensign Group, an announcement from a week or two ago, about starting a captive REIT within their company. I guess for the near term and long term, maybe just break up the questions that way, I guess I'm curious in the short term, with the slowdown in the pipeline of deals that you've done with them, I mean, they had a lot of positive comments on their call about continuing to do transactions with existing REIT partners, etc. But maybe I'll just pause for a second to get your high-level thoughts and ask a few follow-ups on this topic as well. Let me just start to get your thoughts around any implications for you guys, short term or long term, and then we'll go from there. Thanks.

Greg Stapley -- Chairman and Chief Executive Officer

Sure. This is Greg. Look, I don't think it changes things very much for us. We have a good relationship with them, and you saw it in our deal with them in the quarter to do the two Austin facilities. In that case, we brought those facilities to them, having tied them up previously. And I really think that's probably the only way that we will be -- we would be doing deals with Ensign in the future. It's really the only way we've done deals with them.

Their cost of capital has always been good enough. The availability capsule has been good enough. If they found a deal, they could finance the deal, and they've done their own deals and they've done them very, very, very well. That said, with their captive REIT, I'm not exactly sure what they're going to be looking at, if they continue to look at the same kind of distressed assets that -- or have been their bread and butter historically. I don't think there's going to be a ton of overlap. But to us, they really just represent another player in a large marketplace with lots and lots and lots of players that we compete against. And I don't think we're too worried about whether we will get our fair share of the deals. Does that answer your question?

Steven Valiquette -- Barclays -- Analyst

Yes. Yes, that's helpful. Maybe just two quick follow-ups on the same subject. One of them you sort of have answered already, but -- If we look at Ensign Group and Pennant combined, I think your total number of properties combined back in 2014 was 94, now would be 106 currently between the two. So if you've added a couple of properties per year under that combined relationship, it sounds like you were bringing those properties and transactions to them as opposed to the other way around. So it's something going forward that, that will still be the case based on what you said. I just want to confirm that.

Greg Stapley -- Chairman and Chief Executive Officer

Yes. Actually, what happened was we bought a four-building portfolio with an Ensign lease in place last year. And then we did this deal with them this year. I can't think Marketo anything else with them. We bought -- we did a covenant care tack on with a building with them, again, a building we brought to them.

Dave Sedgwick -- President and Chief Operating Officer

And they grew a little bit when they acquired Five Oaks, which is a smaller operator of ours.

Greg Stapley -- Chairman and Chief Executive Officer

That's right. They bought one of our operators and just stepped into the lease that was already there. So those are the kind of deals that we do with them. Again, they have -- they're a great operator. They have a superior cost of capital and if they source a deal, they're going to do that deal themselves every time I would.

Steven Valiquette -- Barclays -- Analyst

Okay. And just a standing check on just the expiration date of your master lease with Ensign Group right now. And then -- I mean you own the real estate, so I'm guessing there's really no risk of losing any of your current lease property arrangements with them, but maybe just long term, is there something -- Should we assume that's all -- would stay in place for long term? Or is there a risk on long term that something changes as far as the size of the relationship and an existing

Greg Stapley -- Chairman and Chief Executive Officer

Yes, that's a good question. I'm glad you brought it up. It gives us a chance to remind everyone that when we set those leases up in 2014, there's eight master leases. -- and they are all -- they all have staggered maturities with various two, three, five year extension options at Ensign can exercise. And they are all well diversified in terms of geography asset class and asset quality. And our -- that was done so that we would be able to have the expectation that there's a very high likelihood that those would be renewed as those renewal options come up.

Steven Valiquette -- Barclays -- Analyst

Okay. One last real quick one. The -- did you know that this strategy was coming from them for a while? Or is this maybe catching you by surprise a little bit as far as their decision around this. Just curious if you have any high-level response to that.

Greg Stapley -- Chairman and Chief Executive Officer

No, I don't think anybody should have been surprised. Lansing has been telegraphing to the market literally for years that they wanted to do something like this without saying exactly what it was going to be. But I think everybody has known that they have a sizable real estate portfolio that they have built since the 2014 CareTrust spin-off. They've done a terrific job with it. And -- And I think it's a good, solid logical step for them in terms of just making sure that they get credit for the value of the real estate equity that they continue to create and build up in that portfolio just as they did with the portfolio that we started with. So they're doing a great job.

Steven Valiquette -- Barclays -- Analyst

Got it. Okay. That's all very helpful. Thanks.

Greg Stapley -- Chairman and Chief Executive Officer

You bet.

Dave Sedgwick -- President and Chief Operating Officer

You bet.

Operator

For our next question, we have Daniel Bernstein from Capital One, Daniel, your line is now open.

Daniel Bernstein -- Capital One -- Analyst

Hi. Thanks for taking my calls here, my questions here. I would like to go back to the skilled mix that you noted that's been increasing. So I wanted to kind of understand a little bit more about how you think about the sustainability of that increase in skilled mix. And maybe how much of that was related to maybe the PDPM versus the uptick of COVID in 3Q?

Dave Sedgwick -- President and Chief Operating Officer

Hey, Dan. I'm not sure that we could attribute the skill mix increase or decrease or any movement there to PDPM necessarily. We've always compared the numbers pre-pandemic to post, and we had about six months of PDPM in those pre-pandemic numbers. Roughly, we're at about 15.5% for skilled mix on our skilled nursing portfolio for pre-pandemic.

We've seen it go as high as 25.5% in December of last year. It kind of came down to, in June, a high 16% and slowly eked back up to September, a number of 18.5%. I think that's largely because of the Delta variant. And we'll see. A lot depends on how long the three-day qualifying stay waiver stays in place. We think that is a key element, of course, to these numbers.

Whether or not that is a permanent change, you know very well is anybody's guess, but probably not something that is worth putting a lot of money on. So I think as the -- when the dust settles on COVID, and we could say that it's far in the rearview mirror, we would probably get back down somewhere closer to those pre-pandemic skilled mix levels.

Daniel Bernstein -- Capital One -- Analyst

Okay. All right. And then on the pipeline, obviously, with some of your operators in the high-lease coverage inside given back the PRF funds, they don't need that. But it seems like maybe from an industry level, the industry continues -- needs continued PRF funds or other federal state support. So is that kind of playing into the idea that you're going to get a pickup in acquisitions and better pricing down the road, that funding maybe goes away next year, and then we'll, maybe, we'll see some more distress, or I don't know if distressed is the right word, but you'll see more assets come to market where operators need financing or way out financially?

Mark Lamb -- Chief Investment Officer

Dan, this is Mark. Yes. That's exactly, I think, the way we view it. We've already seen some smaller operators head for the hills. We're currently working on a transaction right now where that was the case. We closed the deal in El Centro early this year with Bayshire for the same type of situation. So yes, I think when the PRF funds get turned off, when the public health emergency eventually expires, FMAP funding stops flowing, then I think we'll start to see a significant amount of transactions come to market. And I think, at that point, supply is going to abstract demand, and I think that's when price per bed will start to fall.

Daniel Bernstein -- Capital One -- Analyst

Okay. And then one last question on the labor side. I think you noted maybe some easing up of the labor pressures at some of your operators. Is that a matter of increasing wages? Or are they actually seeing increased job applications, more people coming back to the market to work? Just trying to understand maybe the dynamic there that's giving you some green shoots in labor.

Dave Sedgwick -- President and Chief Operating Officer

Dan, it's really a combination of both. We do see higher wages across the board to very varying degrees. On the other hand, with the unemployment benefit lapsing and people kind of burning through their savings from COVID, and there are people coming back to work as well. What we've seen is, and the operators that have had the most success, it's those who bring that same tenacity and follow-up and prompt response that they have around admissions from the hospital, to applications. You combine that tenacity and intensity with a focus on culture and providing a great place to work. And we do see operators that are able to move the dial in a significant way in the face of an otherwise difficult macro environment.

Daniel Bernstein -- Capital One -- Analyst

Okay. So better operators are having better performance, I guess, or better -- less issues on the labor side, all things being equal...

Mark Lamb -- Chief Investment Officer

Yes. Go ahead.

Daniel Bernstein -- Capital One -- Analyst

That's good. So that's all the questions I had. But...

Mark Lamb -- Chief Investment Officer

Thanks.

Operator

[Operator Instructions] For the next question, we have from Jordan Sadler from KeyBanc. Jordan, your line is open.

Jordan Sadler -- KeyBanc -- Analyst

Hi, guys. Just a quick follow-up on the repurchase options and then maybe looping in, just as a reminder, does Ensign -- do any of the Ensign properties have repurchase options -- or any those master leases, rather?

Dave Sedgwick -- President and Chief Operating Officer

No, just the Texas four that we acquired, but none of the original properties.

Jordan Sadler -- KeyBanc -- Analyst

Can you remind me what -- remind us when the Texas four opens up?

Dave Sedgwick -- President and Chief Operating Officer

2027.

Jordan Sadler -- KeyBanc -- Analyst

2027. And then coming back to purchase options, the disclosures on page 13 of the deck, it looks like the first group of purchase options are probably with Noble, I'm guessing, just because it says one of the properties that's held for sale at September 30. Is that sort of the right assumption? And because I would assume, if that were the case, it would be unlikely they would be exercising. Is that fair?

Dave Sedgwick -- President and Chief Operating Officer

That's fair. Yes, we think it's pretty unlikely at this point as well.

Jordan Sadler -- KeyBanc -- Analyst

Okay. And then the next couple down on that list, they are SNPs, one opened up January 1, and that's kind of a bigger chunk. Can you share who that is and what the expectations are around that?

Dave Sedgwick -- President and Chief Operating Officer

So Jordan, let me correct what I said about the Texas four with Ensign. That's actually -- that option opens the end of 2024. And then the next guy in line is a SNF operator in the Midwest. And we also, based on their current performance, would say that it's pretty unlikely that they are in a position to exercise. But we can't know for sure until we get closer.

Jordan Sadler -- KeyBanc -- Analyst

Can you share what the cap rate is on that-the fixed cap rate on that lease revenue, can you share what that is?

Dave Sedgwick -- President and Chief Operating Officer

I don't-yeah, let's see. Fixed price. Let me get back to you on that, Jordan.

Jordan Sadler -- KeyBanc -- Analyst

No worries. Thanks, guys.

Operator

And for our next question, we have Steve Manaker from Stifel. Your line is open. Steve, your line is open.

Greg Stapley -- Chairman and Chief Executive Officer

Looks like Steve is off. Is there anyone else, Sadie?

Operator

We don't have any further questions at this time. You may continue.

Greg Stapley -- Chairman and Chief Executive Officer

Great. Thanks, Sadie. Well, thank you, everyone, once again, for being on today. If you have additional questions, you know where we are. We're happy to engage any time, and we look forward to hearing from you and hopefully seeing you in a conference soon. Thanks, everyone.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Lauren Beale -- Senior Vice President and Controller

Greg Stapley -- Chairman and Chief Executive Officer

Dave Sedgwick -- President and Chief Operating Officer

Mark Lamb -- Chief Investment Officer

Bill Wagner -- Chief Financial Officer

Jordan Sadler -- Analyst

Juan Sanabria -- BMO Capital Market -- Analyst

Amanda Sweitzer -- Baird -- Analyst

Michael Carroll -- RBC Capital Markets -- Analyst

Steven Valiquette -- Barclays -- Analyst

Daniel Bernstein -- Capital One -- Analyst

Jordan Sadler -- KeyBanc -- Analyst

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