Investments for CareTrust REIT (NYSE: CTRE) proceeded at a steady pace in the second quarter of 2023, and there’s still room for more growth backed by sufficient capital on hand.

“We are going into the second half of the year with ample dry powder to continue to grow the business and set up the company for a return to growth in 2024,” CareTrust’s president and CEO, Dave Sedgwick, said during the company’s quarterly conference call on Friday.

CareTrust’s investment pipeline stands at roughly $150 million and is composed mostly of skilled nursing acquisitions, he said. During the second quarter, the San Clemente, Calif.-based REIT, acquired 12 properties for $173.5 million and began six new operator relationships.

“The first half of the year was extremely busy for the whole team here. We’re excited for the new investments and the new operator relationships. We’re pleased to see the vast majority of the portfolio is doing well and in a position to expand together,” Sedgwick said.

The company is seeing favorable deals in the skilled nursing market as prices adjust for assets, executives said.

“There continue to be attractive opportunities to source and pursue skilled nursing acquisitions, particularly in those states where there have been favorable Medicaid rate increases,” said CIO James Callister. “With respect to the skilled nursing acquisitions market, pricing has continued to adjust as we’ve seen a further tightening of credit by lenders.”

The interest rate hikes and variable interest rate loans have created an opportunity for acquisitions, he said. “[Sellers] risk moving forward with many of the high leverage buyers not as active in the acquisition space as they have been previously. And given [CareTrust’s] access to funds through our low leverage and ability to issue equity, we remain focused on external growth opportunities,” Callister said. 

In the second quarter, CareTrust reported a normalized FFO per share of 35 cents, missing Wall Street estimates of 36 cents. It also reported a revenue of $51.55 million during the quarter, beating analyst estimates by $1.4 million.

Despite the lower-than-expected earnings, investment analysts at Stifel said the REIT had a “solid” second quarter, and going forward, the company will benefit from a better operating environment for the sector.

“[Net Operating Income] is growing a bit faster than we expected,” Stifel analysts said. “We believe the portfolio will continue to benefit from the improved SNF operating environment, through improved coverage and potential repayment of some deferrals. Management is mostly through the portfolio repositioning and earnings aren’t suffering much from the transition.”

CareTrust closed on two sales totaling $5.8 million during the second quarter, while two properties are under purchase/sale agreements for about $5.1 million of expected proceeds, with another asset under letter of intent, Stifel analysts noted.

Moreover, the REIT collected 96.7% of contractual rents, executives said.

Current acquisitions market and CareTrust deal pipeline

During the quarter, CareTrust’s total investment amount equaled approximately $200 million at an initial blended yield of 8.4%, Callister said. The 12 facilities acquired include seven skilled nursing, four assisted living, and one memory care.

Moreover, in June, the REIT closed on a four-facility skilled nursing portfolio in Southern California and entered into a 15-year master lease agreement with California-based SNF operator, Links Healthcare Group.

Callister also shared that CareTrust closed three other transactions in June, including the acquisition of a 125-bed skilled nursing facility in Katy, Texas, as well as funding a $26 million mortgage loan secured by a skilled nursing, assisted living, independent living campus located in Loma Linda, Calif. Meanwhile, in July the REIT funded a $15.7 million mortgage loan to a Florida-based SNF.

“We are excited to have put $215 million out to work this year. We do not feel like we are done,” Callister said. “Overall deal flow remains strong, at a pace relatively unchanged from last quarter. We will continue to opportunistically pursue deals where we feel [strong about] our access to capital, low execution risk and reputation as a quality transaction partner. And, it’s a particularly attractive buyer,” he said.

Growth in behavioral health

The REIT has recently been transitioning some of its properties to accommodate for behavioral health. But even as behavioral health demand has grown this year, CareTrust executives said that they don’t expect to accelerate growth in that sector.

“[Behavioral Health] is a space that’s even more fragmented than the skilled nursing spaces in terms of the operators and building those relationships,” said Sedgwick. “Finding the best operators is a bit of a challenge, but it’s what we’re here for, and we want to grow that over time. But it’s really going to be dependent on finding those operators and finding the right creative deals.”