CareTrust CEO: Deal Flow Up, Medicaid Rebasing Takes Sting Out of PHE Ending

As the public health emergency expires today – along with crucial waivers for skilled nursing providers – CareTrust REIT (Nasdaq: CTRE) says some of its tenants could potentially be impacted while others see it as a nonevent.

CareTrust CEO David Sedgwick said his team continues to watch Medicaid rebasing closely as the PHE era 6.25% add-on from the Centers for Medicare & Medicaid Services (CMS) winds down by the end of the year.

“We are for the most part encouraged by the steps many states have taken to permanently address the increased cost of care for operators due to the pandemic and the subsequent high inflation,” said Sedgwick during the company’s Q1 earnings call on Thursday.

Sedgwick honed in on two states – California and Texas – where most of CareTrust’s portfolio is located. While the California SNFs are more or less “settled” in with their Medicaid raise, the Texas SNFs are awaiting their state’s legislative session to end to determine a permanent rate increase.

“Texas, we love the state. They’re long overdue for a rate increase. There’s probably more optimism about an increase passing than we’ve seen in a long time,” said Sedgwick. “California and Texas represent not just states that we like, but states with some of our very best operators who have strong coverage and great teams, so we’re not really sweating the news coming out of those two states.”

Sedgwick said the Texas legislature should make a decision in the coming weeks. He expressed concern that states generally should have done more, or had moved sooner on Medicaid rebasing.

Staffing mandate uncertainty and financial performance

In terms of the staffing mandate set to be released any day now, Sedgwick said there are still a lot of unknowns. Industry leaders still don’t know what staff is going to be included in the mandate, he said, and if non-nursing staff will be incorporated into requirements.

“There’s just too many variables there to comment on it. We’ll just have to wait and see how it finally comes out,” said Sedgwick.

But, industry veterans are working hard to educate regulators in DC on what a staffing requirement could inflict on operators, and what conditions might make the mandate manageable.

“We’re hopeful that the time CMS is taking is evidence of them weighing seriously the realities on the ground that are being shared with them,” said Sedgwick.

CareTrust reported 93% of contractual rent collected, and a net income of $19.2 million for Q1 2023, with net income per share of 19 cents. That’s quite the jump compared to a net income loss of $43.3 million from Q1 2022.

Normalized funds from operations (FFO) was $35 million for the quarter, a slight decline from $35.856 million for normalized FFO in Q1 2022.

Normalized FFO per share was at 35 cents, a decrease from 37 cents in Q1 2022.

Stifel analysts chalked up the earnings results as “another good quarter,” and in-line with consensus. However, earnings missed Stifel estimates largely due to “other items,” including an assumption that there would be more revenue from acquisitions and dispositions along with other revenue sources like negotiated fees, rather than a negative impact from operations.

“We think this quarter shows a marginal improvement in operations that should continue as occupancy builds,” Stifel analysts said in a note published on Wednesday.

Preliminary operator reports show occupancy increases between December 2022 and March 2023 by 120 basis points to land at 75.3% for skilled nursing. Still, operator tenants are about 300 basis points behind a full occupancy recovery to pre-pandemic levels for the entire portfolio.

CareTrust’s portfolio consists of 205 properties across 24 states, with 18 operator tenants. That’s about $1.8 billion in investments and 21,833 operating beds/units, the REIT reported in its financial supplement for Q1.

Pipeline, dispositions and acquisitions

Sedgwick’s anticipation from Q4 that sellers would be steered their way as a result of delays from tighter credit markets has come true. The REIT saw an increased flow of deals, resulting in “exciting new investments.”

CareTrust closed on three SNF transactions and two seniors housing facilities for a combined $47 million since its last quarterly call, Sedgwick said.

James Callister, Chief Investment Officer for CareTrust, said the REIT paid approximately $17 million for a 280-bed SNF portfolio, with one facility in Texas and the other in Kansas. The Texas facility will be a tack-on to an existing master lease with SNF management company Momentum Skilled Services.

The Kansas facility comes with a new operator relationship – Summit Healthcare Management.

The third SNF acquisition was for a 148-bed facility in Atlanta, Ga. for approximately $12 million, Callister said. The facility is managed by another new operator tenant for CareTrust, the Elevation Group.

“These transactions reflect what is one of our top priorities this year – a return to acquisitions,” said Callister. “Given the current lending environment, we continue to opportunistically pursue actionable deals where we feel our access to capital, low execution risk, and reputation as a quality transactions partner make us a particularly attractive buyer.”

The pipeline today sits at $150 million to $200 million, said Sedgwick.

Sedgwick shed more light on a particular unnamed Iowa SNF operator as well that accounted for roughly $5 million of contractual rent last year, but that operator had not paid rent since November 2022. The operator is managing the former Trillium portfolio.

“[They] very recently terminated their CEO,” said Sedgwick. “Since then, they have made a full rent payment in March, a partial rent payment of $100,000 in April, and thus far no rent in May. They replaced their CEO just last week, and we’re talking through all options with them.”

This operator isn’t in CareTrust’s top 10 SNF providers, he said, but its status is keeping the REIT from issuing annual guidance.

As of now, all options are on the table concerning this SNF operator, he said.

“Could we end up selling this portfolio this year? We certainly could,” noted Sedgwick. “But a lot of discussion still has to take place with these guys to figure out what they want to do and what’s the best path forward for both parties.”

The fact that the company has hired a new CEO indicates they want to keep their assets, and are working on stabilizing properties and making progress, he added.