CareTrust: COVID Response Proves State, Federal Leaders ‘Will Not Allow the Industry to Fail’

For many potential skilled nursing investors, the threat of government action — either through new regulations or wholesale changes to payment models — has represented one of the largest risks.

But while COVID-19 has brought unprecedented operational strain to nursing homes across the country, leaders at major health care landlord CareTrust REIT (Nasdaq: CTRE) believe that the government’s response only bolsters the case for investing in the space.

“Hopefully this highlights the fact that the quote ‘stroke-of-the-pen risk’ so many in the credit community and elsewhere wring their hands over actually goes both ways,” CEO Greg Stapley said Friday on the company’s second-quarter earnings call.

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In particular, Stapley pointed to the variety of cash support programs authorized under the CARES Act, the suspension of the three-day qualifying hospital stay rule, and other regulatory relief as key factors that helped keep the real estate investment trust’s (REIT) skilled nursing tenants on a stable footing during the crisis.

“If the government’s response to this pandemic proves anything about that dynamic, it is that both state and federal officials understand and are fully committed to the long-term health and economic survival of post-acute care as a truly essential industry,” Stapley said.

Dave Sedgwick, the chief operating officer at the San Clemente, Calif.-based company, echoed Stapley’s optimism.

“Our belief from day one has been, and continues to be, that skilled nursing is a necessary component of the continuum of care, and that state and federal governments will not allow the industry to fail,” Sedgwick said.

Like the other public health care REITs that have reported earnings so far this round, CareTrust has not had to offer any significant rent concessions to tenants, collecting 99.5% of contracted rent in the second quarter and 98.7% in July.

The REIT also saw positive shifts in Medicare mix that have helped to mitigate declines in occupancy: Overall census at the REIT’s skilled nursing tenants, not including those operated by the Ensign Group (Nasdaq: ENSG) declined 684 basis points from March to July, Stapley said, but Medicare mix jumped 571 basis points.

“Those skilled patients represent higher revenue and margin, and offset to a degree declines in overall occupancy,” Sedgwick said.

The REIT logged net income of $18.9 million during the second quarter of 2020, as compared to $19.7 million over the same period last year.

Leaders at CareTrust additionally pointed to the strong performance of tenant The Ensign Group (Nasdaq: ENSG), which earlier in the week made news for returning all $110 million in federal aid that it had received in the wake of reporting another record quarter for earnings.

In response to an analyst question about CareTrust’s contingency plans for COVID-19 resurgences in markets such as California and Texas, Sedgwick noted that those regions are dominated by Ensign in the CareTrust portfolio.

“Having the Ensign Group as our primary tenant is a pretty strong contingency plan,” Sedgwick said.

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