CareTrust REIT (NYSE: CTRE) has been busy with its investment pipeline this week, announcing $378 million in new investments after June 30, and on top of $268 million in investments during the second quarter.

Chief Investment Officer James Callister said competition for skilled nursing acquisitions is high as oncoming improvement and post-COVID performance has resulted in more facilities approaching or returning to stabilization.

“The investment environment for the skilled nursing pipeline continues to reload from a steady flow of interesting and external opportunities coming across the desk,” Callister said during Friday’s earnings call. The pipe consists “pretty exclusively” of skilled nursing opportunities right now, he said.

Strategic investments and relationships have positioned the REIT to capitalize on opportunities, turning crosswinds into tailwinds, CareTrust CEO David Sedgwick said. He also touched on the Skilled Nursing Facility Prospective Payment System (SNF PPS) final rule, occupancy and leadership changes at the American Health Care Association and National Center for Assisted Living (AHCA/NCAL), with Clifton J. Porter II due to succeed Mark Parkinson in the fall.

“The price we pay and the operator we choose is intended to result in long term quality care … we do not live for the quarter,” said Sedgwick. “The most critical decision for any investment is matching the right operator with the right opportunity … we’re not interested in growth for growth’s sake, each investment should stand on its own.”

About $260 million of the $378 million will be put toward a senior mortgage loan, and $43 million toward a preferred equity investment in connection with the acquisition of a 37-facility portfolio located in the Pacific Northwest. The borrower is a joint venture between a subsidiary of the PACS Group (NYSE: PACS) and another large health care real estate owner, CareTrust said in a statement.

The portfolio is made up of 21 skilled nursing facilities and 16 seniors housing properties in Oregon, Washington, Alaska, Arizona, Idaho, California, Montana and Nevada. Facilities will be operated by other subsidiaries of the PACS Group.

“Pricing on acquisition targets has increased to some degree, but it’s been held in check by the current capital market environment. Evaluations remained within historical cap rates for skilled nursing,” said Callister.

CareTrust reported $764.5 million in investments year-to-date, and net income of $10.8 million for Q2, an improvement over Q2 2023.

Funds from operations (FFO) was 36 cents per share, a 2.9% increase compared to Q2 2023, meeting analyst expectations, and coverage declined modestly, according to a note from BMO Capital Markets.

Acquisitions year-to-date have been “very strong,” with the REIT “delivering” on promised pipeline acquisitions.

CareTrust updated its annual guidance for 2024, projecting on a per-diluted weighted-average common share basis net income of 86 cents to 88 cents, and normalized funds from operations (FFO) of approximately $1.46 to 1.48, and normalized funds available for distribution (FAD) of $1.50 to $1.52.

Exit of small- to mid-sized operators

In terms of who is selling, CareTrust continues to see small- and mid-size mom and pop operators selling their portfolios and exiting the business, Callister noted. Higher buyer demand, operator exhaustion in a post-COVID world, loans reaching maturity and a difficult regulatory environment are just some of the factors leading to the current investment environment.

“With respect to the regulatory environment, in some states we are seeing stricter annual inspection surveys from regulators and corresponding penalties. In addition, change of ownership approvals in many states are taking longer, and as a result transactions are delayed as parties wait for regulatory consent,” said Callister.

Buyers like CareTrust – those with operational roots and a capitalized, nimble and practical position – provide certainty to sellers, he said.

Aside from its $378 million announcement, the San Clemente, Calif.-based real estate investment trust (REIT) closed approximately $268 million of investments during Q2.

Of Q2 investments, CareTrust funded $90 million of a $165 million senior mortgage term loan, with KeyBank National Association backing the remaining $75 million. The loan will be used by the borrower to acquire eight skilled nursing facilities in the Southeast.

CareTrust later funded approximately $75 million of the loan on July 30, and the REIT now holds the entire $165 million loan.

The REIT also expanded its relationship with Bayshire Senior Communities through the $61 million acquisition of three facilities in California, and started a new relationship with operator Yad Healthcare with the $81 million acquisition of five SNFs in the Carolinas.

CareTrust closed another mortgage loan for $27 million to the buyer of two SNFs in Tennessee, leased to affiliates of the Ensign Group (Nasdaq: ENSG).

Underperforming assets, occupancy updates and the SNF PPS

CareTrust said the amount of underperforming assets remains small and manageable, but there are a few transitions underway that will result in higher revenues in 2025.

“The Midwest SNF portfolio that has been held for sale remains in held-for-sale status as of today. These transitions and dispositions taken together will effectively deal with all of the properties that have underpaid this year,” said Sedgwick.

Skilled nursing assets in Q2 finally surpassed pre-pandemic occupancy numbers, while skilled mix was down slightly year-over-year but operators appear to be “settling in,” he said. The new normal is quite a bit higher than the pre-pandemic skilled mix at about 330 beds higher than usual.

Assisted living still has a ways to go, Sedgwick said, but still saw a 280-bed increase year-over-year.

In terms of the SNF PPS Medicare increase of 4.2%, Sedgwick doesn’t think the industry has outrun inflationary effects quite yet.

“Medicare and Medicaid rates, depending on the state, there’s a couple years of lag that is going into that math,” said Sedgwick “The rate increase that we’re getting for fiscal year 2025 isn’t really based on 2024 for inflation on the labor – it’s actually further back than that. I think that we still might have a little bit more of an elevated rate going forward.”