CareTrust Touts $300M Skilled Nursing Pipeline for 2019

CareTrust REIT (Nasdaq: CTRE) turned in solid earnings results for the fourth quarter of 2018, with a sizable pipeline of skilled nursing assets coming in 2019.

The real estate investment trust’s quarterly revenue of $40.4 million beat analyst estimates by about $270,000, and represented an increase of around 10% from the previous year. Still, chief investment officer Mark Lamb classified CareTrust’s total 2018 acquisition haul of $116.4 million as a “pretty light year” on the company’s Thursday afternoon earnings call — before hinting at a much more aggressive 2019 to come.

“It can be hard to pass on deals when they can be had just by lowering our underwriting standards a little or by focusing more on a broker’s rosy pro forma than an asset’s actual performance,” Lamb said, emphasizing the company’s discipline in assessing the marketplace over the last year.

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The San Clemente, Calif.-based CareTrust has up to $300 million in assets under serious consideration for the coming year, including a pending $211 million acquisition of 12 facilities — 10 SNFs and two senior housing campuses with skilled nursing assets — from BME Texas Holdings, LLC.

Executives on the conference call with investors and analysts remained largely mum about the specifics of the deal, pointing to its complexity and the layers of approvals that remain before the transaction can close. Under a material definitive agreement announced late last month, CareTrust will acquire full membership interest in 12 separate entities that will be formed for each location as part of the transaction.

But that didn’t stop CEO Greg Stapley from hinting at its potential magnitude for the REIT.

“We stand on the cusp of another new growth opportunity, which, if we can get it successfully closed, would surpass in size anything we’ve done to date,” Stapley said.

The $300 million in potential deals for the REIT consist almost exclusively of SNF assets, according to management, and the company has already announced several transactions in the early going of the year — including its $43.9 million expansion with existing tenant Covenant Care in California and the $9 million pickup of the Oakview skilled nursing and supportive living campus in Mt. Carmel, Ill.

It’s all part of a generally active mergers-and-acquisitions pattern that the company has seen in the initial quarter of 2019, as operators continue to shed non-strategic assets. While many industry-watchers — including Lamb himself — had predicted that the impending rollout of the Patient-Driven Payment Model would drive smaller, single-unit operators out of the industry entirely, Lamb on Thursday threw some cold water on that trend in response to analyst questioning.

“I’m sure that has some bearing, but I don’t think we’ve seen mom-and-pops that are saying: ‘Hey, we’re heading for the hills. We don’t want to go through another change,'” Lamb said. “I’m sure maybe there’s a small fraction of [them] thinking about PDPM, and the changes help them to get off the sideline, but at the end of the day, you have mom-and-pops that are looking at relatively low cap rates and can monetize their assets today.”

CareTrust reaffirmed its sunny outlook for the new payment model, which takes effect October 1, despite pointed questioning from analysts about the budget-neutral nature of PDPM. While many operators and investors have predicted that they’ll see reimbursement boosts under the model, the overall federal government’s overall Medicare spend on skilled nursing services will not change, meaning some must naturally be losers.

Chief operating officer Dave Sedgwick said his team has been working closely with its operating partners to figure out the specific outcomes of the new model, pointing to the anecdotal example of a provider in Illinois that was projected to come out ahead by its electronic medical records provider, PointClickCare.

“They showed a significant increase to their revenue, which is great, because most of that is going to just drop to the bottom line — not even factoring in any efficiencies that they’re going to get by having the flexibility around their therapy cost,” Sedgwick said.

Some of CareTrust’s operators have also begun making moves to shift therapy services in-house and cease partnerships with third-party providers, Sedgwick said.

“Several of them are planning on going in-house with rehab, and if they’re not, they’re in active discussions with their therapy providers to come up with a different arrangement to pay for those therapists, as they are now not so much a profit center but a cost center,” he said. “So that’s in motion right now, and I think we’ll see different ways to skin that cat as the months progress.”

CareTrust’s stock closed Thursday’s trading up slightly, gaining $0.13 — or 0.59% — to reach $22.16.

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