CareTrust REIT (NYSE: CTRE) executives disclosed their intention to sell 11 skilled nursing facilities in the Midwest that were classified as held for sale in the second quarter.
The announcement was made during the company’s third quarter conference call on Friday, and in the broader context of CareTrust’s proactive portfolio management strategy. Executives indicated that they hoped to close the sale before the next earnings call.
While specific details about the facilities and potential buyers were not provided, the company expressed its strategic decision to optimize its portfolio by divesting from these assets.
“We continue to see robust deal flow in skilled nursing transactions. Pricing that is based on stabilized cash flows and coverage is still very rare,” CareTrust’s president and CEO, Dave Sedgwick, said during the call. “That said, we’re also seeing a decrease from the last couple of years in transactions involving portfolios that are experiencing negative cash flows and heavy losses.”
Investments for CareTrust continued to show steady growth. The REIT invested an additional $79 million since Q2 with a blended estimated stabilized yield of 10.2%. The investment activity comprised two loans totaling just over $19 million at a blended rate of 9.6%.
These loans were extended to borrowers and operators with expectations to lead to future acquisition opportunities, Sedgwick said.
Portfolio overview and operator relationships
The company also made two acquisitions in the third quarter, adding three skilled nursing facilities in California to its portfolio. One skilled nursing facility was added at a yield of 9.7%. The second deal was for two high-performing skilled nursing facilities with a lease in place operated by Covenant Care.
“Covenant Care’s property level EBITDAR coverage pops to 1.43 times. The leases in place initially yield just under 6%, but in 2027, the leases provide for a rent reset. Assuming current performance is maintained, our yield at the time of the reset is projected to be just under 11%,” Sedgwick said.
The company’s portfolio demonstrated improved lease coverage overall, executives said. Covenant Care’s EBITDAR coverage notably increased to 1.43 times, driven by the acquisition of two well-covered facilities.
Despite positive trends, there were challenges with Eduro Healthcare, whose lease coverage experienced a downward trend in the last couple of quarters. CareTrust executives said they were actively working with Eduro to find solutions for non-core facilities deemed to be better managed by other hands.
When questioned about the potential rent disruption with Eduro, executives said it was not yet clear.
“We’re still working through a couple of different scenarios with them,” executives said. “As we sit here today, we don’t think that it’s going to be anything material to us.”
Regulatory landscape and advocacy
Caretrust executives addressed the regulatory front, expressing concerns about the proposed minimum staffing mandate.
The industry collectively called for significant changes to the proposed rule, which mandates 24-hour RN coverage and specific hours for certified nurse aides (CNAs), without consideration for LPN hours or acuity adjustments. The company joins numerous industry stakeholders in expressing hopes for modifications to the proposed rule to make it more workable for the sector.
“We add our voice to the thousands of others in our industry that have called for significant changes to the proposed minimum staffing mandate from the federal government,” Sedgwick said. “[T]he industry is unified in its efforts to work with CMS to modify the proposed rule to be in a form that the industry can work with. We’re hopeful that CMS will pay attention to the feedback they’ve solicited and modify the rule.”
Pipeline and future outlook
James Callister, chief investment officer at CareTrust, discussed the REIT’s robust pipeline, emphasizing a favorable investment landscape as it heads into 2024.
He said that despite a smaller buyer pool, the company remains optimistic about the investment environment, citing a favorable cost of capital, flexible balance sheet, and a macro environment that has sidelined high-leverage competitors.
“We will continue to execute on our acquisition strategy of disciplined growth with risk-adjusted returns,” he said.
He added that CareTrust’s pipeline is around $175 million and mainly consists of single and double units, and that the REIT is continuing to review a few larger portfolio opportunities.
“That would not only strengthen existing tenant relationships, but would also allow us to further diversify our tenant base by commencing relationships with outstanding operators that we have been scouting for some time,” he said.
Bill Wagner, chief financial officer at CareTrust, said that rental income for the quarter reached $51.2 million, attributed to new investments, an adjustment to the cost of living and income, and tenant reimbursements.
He said that the company’s balance sheet remains strong, with liquidity supported by cash on hand and future ATM proceeds, among other factors.
CareTrust missed Wall Street estimates by a penny, reporting a Q3 FFO of 35 cents a share.
However, Stifel analysts expect strong earnings growth next year, noting CareTrust’s favorable position to acquire.
“It is an attractive way to play the recovery in the SNF business,” Stifel analysts noted. “The REIT used its attractive cost of equity to deliver significantly … This puts [CareTrust] in a position to buy assets over the next year and use debt to fund the purchases.”
Stifel analysts also said that CareTrust raised a lot of equity towards the end of the third quarter and used the proceeds to draw down debt to very low levels. “We expect it to increase over the next few quarters as [CareTrust] ramps up acquisitions,” analysts said.
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