CareTrust Sees ‘Better Returns and Brighter Future’ For Skilled Nursing

CareTrust REIT (Nasdaq: CTRE) touted the resolution of tenant issues and predicted a brighter future for skilled nursing on its first-quarter earnings conference call — even with lagging deal volume in the sector.

The real estate investment trust (REIT) was upbeat about completing a planned Ohio operator swap that saw Pristine Senior Living and Post-Acute Care replaced with new operators, Trio Healthcare and Hillstone Healthcare. In addition, two facilities leased to OnPointe Health were transferred to existing master leases with Providence Group and Eduro Healthcare.

Pristine missed $2.3 million in rent payments last year and had to be placed on a cash-only plan with a recorded reserve. The experience with the operator has led CareTrust to do “some serious self-examination around our vetting process for new operators,” CEO and Chairman Greg Stapley said on the call.


Vice president of operations Dave Sedgwick said transitioning the remaining Ohio portfolio to Trio and Hillstone has led to a significant upgrade in operating capabilities for both the facilities involved and for growth opportunities.

“Both companies scored very well on our operator scorecard, and both moved quickly with us to take over operations by May 1,” Sedgwick said. “We’re confident that the lease coverage for this part of the portfolio will be much stronger 12 months from now.”

He also expressed confidence in CareTrust’s current roster of operators, stressing that there are no operators the REIT deems at risk of not making rent.


The company’s internal scorecard was developed to find information about operators that wouldn’t come up during a normal underwriting process, Sedgwick said — including credit metrics, staff turnover, culture, and “the management team’s battle experience.”

Mark Lamb. director of investments at CareTrust, echoed the cautionary strategy.

“This enhanced discipline caused us to cancel a large deal that we had under contract just a few months ago in which we would have bought assets with leases and an operator in place,” he said. “We liked the assets well enough, and from a real estate and finance standpoint, the deal looked like a winner. But the operator could not meet our new, more detailed operating criteria, and we accordingly pulled out.”

A few months later, he said, that operator’s assets in several different states were placed in receivership.

The overall optimism came as CareTrust reported first-quarter net income of $14.61 million, compared with net income of $10.28 million, or 15 cents per share, in the year-ago period.

‘Lagging’ deals

Deals attractive to CareTrust are slow in coming, Lamb said, though the REIT may keep looking for chances to “recycle small amounts of capital” in the current environment. Such dispositions would be driven by investing in small size and static tenant relationships, however.

In response to analyst questions about whether the company’s scorecard extends the pace of future investments, Lamb said it requires the company do more work upfront in vetting operators before placing facilities with that operator.

“I don’t think it’s going to change the pace,” he said.

CareTrust’s pipeline consists primarily of skilled nursing facilities, and Lamb said that though volume is down, the REIT is seeing “some very interesting opportunities that we think can not only be accretive to us but accretive to coverage and cash flow for our tenants.”

He also noted rumblings that volume could pick up due to inventory going to the market in the second half of the year.

“We are cautiously optimistic that deal flow will pick up, especially on the skilled nursing side, where we see better returns and a brighter future,” Lamb said.

Written by Maggie Flynn

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