CareTrust Embraces Complexity with $500M Acquisition of American Health Communities Portfolio

Leaders with CareTrust REIT (NYSE: CTRE) added more detail surrounding the company’s latest investments, including the acquisition of 31 skilled nursing facilities in Tennessee and Alabama for $500 million, along with another transaction yet to close for $57 million involving four skilled nursing facilities located in the Northeast.

American Health Partners was announced as the seller for the 31-SNF deal, divesting its American Health Communities and Rehab America divisions to CareTrust and a leading privately-held real estate investment firm. This makes American Health Partners more of a pure-play insurer with its remaining business lines.

There’s a tradeoff between investment volume and deal structure in recent years, said CareTrust CEO David Sedgwick during the REIT’s Q3 earnings call on Wednesday. While the REIT would usually prefer a “vanilla, triple-net deal with no strings attached, and no partners attached,” its latest deals are more complex in structure, he said.

Advertisement

Deals have largely come to the company through an existing relationship, and have been off-market completely, Sedgwick said.

“For the last couple years, we’ve made it pretty clear that there’s got to be true long-term real estate economics for us. That conversation is becoming much more efficient and productive than it was a couple years ago,” said Sedgwick.

CareTrust’s third quarter earnings met analyst expectations of 38 cents a share, with $441 million of investments at 9.1%. In terms of the latest acquisitions, analysts at BMO Capital Markets said in a note that they were impressed with the execution and quality of operators. Quarterly normalized funds from operations at 38 cents per share, fell below BMO’s estimate of 39 cents per share.

Advertisement

Year-over-year market capitalization growth was an astonishing 123%, CareTrust reported. The REIT initiated a process to extend and upsize its existing revolving credit lines to $1.2 billion, with cash on hand of about $234 million.

Complex deal structure

CareTrust and a joint venture partner agreed to acquire the portfolio made up of 31 skilled nursing facilities, operated by existing partners of the REIT including The Ensign Group (Nasdaq: ENSG), PACS Group (NYSE: PACS), Links Healthcare Group and a regional operator, the company announced Tuesday.

The portfolio being acquired has 3,290 licensed beds, with 30 of the locations in Tennessee and one in Alabama. CareTrust’s joint venture partner is a large, third-party health care real estate owner, according to Tuesday’s press release.

“We’re excited about the tenant mix. Links is performing fairly well based on the transaction we did with them a couple of years ago,” said CareTrust Chief Investment Officer James Callister. “We can expect that upward trend to continue with them. They do a great job and I think that their depth, looking at this transaction and these facilities, was really impressive to us. They dug in all the way.”

Michael Bailey, president and CEO of American Health Partners, said the sale will help his company focus more on growth, innovation and value-based care, streamlining its remaining divisions of American Health Plans, TruHealth, Unity Psychiatric Care and AmPharm.

“We’re excited to begin this new chapter for our company,” Bailey said in a statement released in conjunction with CareTrust’s earnings call. “This agreement allows us to sharpen our focus on expanding into new markets and embracing a value-based care model that aligns perfectly with our Medicare Advantage strategy and TruHealth’s proactive approach.”

2025 will be a year of significant potential diversification and growth, Sedgwick said. The JV acquisition is set to close in two phases in December, noted Callister

The team announced an updated investment pipeline of $700 million, which includes the JV to acquire 31 properties.

“The announcement of this transaction should provide a fantastic way to finish out what has been an extraordinary growth year for CareTrust, and set the stage for continuing the momentum into 2025,” Callister said.

Deal flow, narrow buyer pool

Callister added that the flow of deals remains consistently strong, with regional owner-operators as well as smaller independent owners still looking to sell, capitalizing on improved operating conditions.

The buyer pool, however, continues to be “somewhat narrow,” he said, but still incredibly competitive. It’s very active with private money and others vying for the same deals. The possibility of other buyers re-entering the market won’t have that much on an already competitive market, added Callister.

“The buyers who bring certainty of closing continue to have a distinct advantage,” said Callister. “We continue to leverage our relationships and our disciplined investment approach to identify opportunities that offer appropriate risk-adjusted returns that match the right operators with the right assets.”

CareTrust’s assets are currently overwhelmingly skilled nursing, but the team still won’t rule out adding seniors housing assets in future. It needs to be a “Goldilocks” situation, Sedgwick said, with sufficient size, the right people experienced in the sector, and if it comes with exceptional operators.

Demographic trends are in CareTrust’s favor, Callister noted, with ongoing supply and demand advantage for post-acute and senior care. The REIT is confident that the sector will continue to provide a significant runway for future growth.

Asset performance

In terms of quality care with its skilled nursing assets, CareTrust is seeing higher-than-average 5-Star ratings for September, an average of 3 stars compared to 2.8 for the same operating markets.

While it’s not an end-all-be-all way of measuring quality in nursing homes, the 5-Star Quality Rating System is a way to read the “tea leaves,” Sedgwick said. Quality measure ratings are even higher at 4 stars versus 3.4 stars on average.

Underperforming operators remain “small and manageable,” Sedgwick said, with a couple of transitions underway and a handful of assets for sale that will translate to higher revenues once sold.

CareTrust’s Midwest skilled nursing portfolio, which had negative lease coverage for the past couple years, was sold during Q3. The REIT has eight assets as held-for-sale with $16 million book value and reported 98.7% of contractual rent collection for Q3.

Companies featured in this article:

, , , , ,