Several of the major health care real estate investment trusts (REITs) have responded to the challenges and upheaval of the COVID-19 pandemic by withdrawing their earnings guidance for the year — a move that’s entirely understandable given the number of unknowns about the impact of the resulting emergency on tenants.
But the San Clemente, Calif.-based CareTrust REIT (Nasdaq: CTRE), which owns 153 skilled nursing facilities and 39 assisted living facilities, isn’t taking a similar step, at least not for now.
With some of the support its tenants have received in terms of both state and federal assistance, CareTrust believes the previously issued guidance — net income of approximately 76 to 78 cents per share can be achieved — CareTrust chairman and CEO Greg Stapley said.
Because “the act of withdrawing guidance could be regarded as a form of guidance in and of itself,” the company is therefore holding steady and neither withdrawing or updating those numbers, Stapley said. That said, any significant changes to the economy or from the government related to the pandemic could change the REIT’s outlook, Stapley noted.
“It probably feels like we’ve given with one hand and taken away with the other,” he admitted on the call, which was held on May 8. “But we simply want to convey that despite all the uncertainty, there is a possible path through this for us and our tenants, and they — and we — are working very hard to make that happen.”
CareTrust reported net income of $19.33 million, or 20 cents per share, for the first quarter of 2020, compared with net income of $16.05 million, or 18 cents per share, in the year-ago period. Th REIT reported first-quarter 2020 total revenue of $44.34 million, compared with total revenue of $39.66 million in the year-ago period.
Caution on COVID-19 numbers
CareTrust COO Dave Sedgwick noted that as of this week, it had 29 facilities across eight operators that have reported at least one positive COVID-19 case. But he also warned against putting too much stock in those numbers.
“While we recognize that those figures are of some interest to you, we have generally viewed the running COVID counts as a bit of a red herring, due to the inconsistency in testing practices industry-wide,” Sedgwick said. “Early on our thesis was that any report of COVID cases would be grossly inaccurate and lower than the true numbers. Our expectation has been that most facilities, including some of the very best ones, will deal with COVID at some level. We believe those expectations are being borne out.”
The primary challenge, Sedgwick said, is the fact that carriers of the virus can be both asymptomatic and contagious, making it very hard to identify those that are infected — an issue made even worse by the shortage of testing.
But in most cases, operators can successfully care for COVID-19 patients and treat them in a controlled way, given their protocols, staff, and the fact that they already have to deal with other major infectious diseases, Sedgwick maintained.
CareTrust also saw the challenges many of its operators were facing in securing personal protective equipment (PPE), with many reporting that their smaller orders could not “get the attention of the big medical suppliers.”
That led to CareTrust communicating with all of its operators to find a source for “reasonably priced PPE.”
“We leveraged our portfolio size to get the attention of the supplier and placed a seven-figure order in behalf of our operators,” Sedgwick said. “Not only did they get more PPE and get it sooner, we estimate that our bulk order resulted in roughly $2 million of combined savings for our smaller tenants. This week we’re working on another order of PPE for them.”
Like its peers, CareTrust reported that skilled nursing occupancy has declined due to the suspension of elective procedures and the dropping volumes in emergency departments.
The SNFs that depend most on short-term rehab patients from hospitals are getting hit the hardest, Sedgwick said, while facilities that primarily care for long-term Medicaid residents have been less affected. The REIT’s SNF portfolio includes about 75% Medicaid residents and 16% short-term Medicare or managed care patients, also called “skilled patients.”
Overall SNF portfolio occupancy for CareTrust declined 370 basis points in April, while skilled-patient occupancy actually rose by 240 basis points — not including The Ensign Group (Nasdaq: ENSG), Sedgwick said. This could help offset the financial hit from the overall declines in census.
CareTrust’s portfolio also saw combined benefits from the CARES Act of about $60 million, he added. For that reason, CareTrust is optimistic about its operators’ ability to care for residents, keep employees, and pay rent.
In addition, though not all states have taken advantage of a 6.2% increase in Federal Medical Assistance Percentages (FMAP), some have passed those funds to SNFs, according to Eric Gillis, CareTrust vice president of portfolio management and investment. Those states include Washington, Louisiana, Montana, and some others in CareTrust’s portfolio.
Most of that has been retroactive to March and will continue through the pandemic; the estimated impact of that to the CareTrust portfolio is about $5 million, Gillis said.
That, combined with the other measures, keeps CareTrust optimistic about its tenants ability to stay viable.
“Thanks to the emergency measures taken by state and federal officials, liquidity has actually improved from most of our operators, including those who have been on our watch list in recent quarters,” Sedgwick said. “In April, we collected 99.3% of contract rents. As we sit here today, we’ve collected 99.8% of May rents.”
CareTrust’s stock closed at $17.52, up 10.26%.
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