CareTrust REIT (Nasdaq: CTRE) expects its skilled nursing assets to return to pre-pandemic occupancy by next summer, with continued recovery from the second to third financial quarter ending Sept. 30.
About 60% of the real estate investment trust’s (REIT) skilled nursing operators are “within 90% of their pre-pandemic census or better,” David Sedgwick, president and COO of CareTrust, said during the company’s third quarter earnings call on Monday.
“The delta surge appears to have actually given a bounce to some of our operators in the region’s most affected. Overall, portfolio skilled mix remains about 300 [basis points] higher than the pre-pandemic levels, but the higher reimbursement rates offset some of the overall occupancy loss,” added Sedgwick. “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.”
CareTrust has 160 skilled nursing facilities in its portfolio — the majority of its assets — followed by 40 seniors housing buildings and 24 multi-service campuses. San Clemente, Calif-based CareTrust acquired two skilled nursing facilities for approximately $32.5 million during the quarter, included in the 160 count.
The Austin, Texas, properties — 122-bed Cedar Pointe Health and Wellness Center and 119-bed Sedona Trace Health & Wellness Center — will be leased to the Ensign Group, CareTrust said in its earnings statement.
Ensign is CareTrust’s largest tenant, but the REIT didn’t appear concerned by Ensign’s latest move to form its own captive REIT in October, when asked during the Q&A portion of the call.
“I don’t think it changes things very much for us. We have a good relationship with them, you saw it in our deal with them in the quarter to do the two Austin facilities,” said Greg Stapley, chairman and CEO of CareTrust. “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 doing deals with Ensign in the future.”
Other investment opportunities have been forgone, Stapley said during the call, while the REIT waits for skilled pricing to “rationalize.” CareTrust Chief Investment Officer Mark Lamb said the REIT is content to let overpriced assets go to “less experienced and ultra-high leverage buyers.”
Lamb pointed to continued government support playing a role in the skilled nursing market, with deal flow for stabilized assets being “very light” and distressed properties holding on longer when they would otherwise sell due to negative economic terms or challenges tied to reduced occupancy and higher labor costs.
“It’s 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 perfect discount,” said Lamb. “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.”
CareTrust’s active deal pipeline is between $125 million and $150 million and comprises single asset and smaller portfolios, equally weighted between skilled nursing and seniors housing.
For the quarter, 96.2% of rent was collected across all asset types, and normalized funds from operations (FFO) was $36.7 million (38 cents per share); that’s an increase of 14% from the same quarter in 2020.
CareTrust beat analyst estimates on revenue by $17 million, coming in at $48.6 million for the quarter, according to SeekingAlpha.
Skilled nursing census increased from 69.7% in June to 71.5% in September. Pre-pandemic occupancy was 77.7% for CareTrust’s SNF assets, but Stapley said it’s gains on the census front are just “half of the equation,” citing staffing challenges.
“A 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,” said Stapley during the call.
Still, skilled nursing operators say they’re hitting, “record occupancy numbers or close to them,” said Sedgwick.
Ensign reported four sequential quarters of occupancy growth, and Priority Management Group has grown its occupancy 6.7 percentage points since December, Sedgwick said.
Trillium Healthcare has cut expensive agency staffing by $400,000 per month since summer months, Sedgwick continued, and reduced staff turnover from 60% to 20%.
“These positives don’t mean that many of them won’t need or benefit from the next round of Provider Relief Funding (PRF). We believe all of our operators have applied for phase four except for Ensign and Pennant who have not needed or accepted relief funds from the beginning,” Sedgwick said during the earnings call. “We’ll find out how much the phase four funds extend the runway for each operator as funding amounts are determined and checks are received in late November and December.”
Companies featured in this article:
CareTrust REIT, Cedar Pointe Health and Wellness Center, Ensign Group, Priority Management Group, Sedona Trace Health & Wellness Center, Trillium Healthcare