In a bid to maintain operational strength for years to come, CareTrust REIT Inc. (CTRE) made some bold moves during the first quarter, including a $856 million strategic acquisition of U.K.-based Care REIT. CEO and President Dave Sedgwick cited the deal as an example of his company’s desire to seize a window of opportunity to diversify operator concentration, geography, payer sources, and asset classes – while exploiting strong company fundamentals and industry tailwinds.

“The [U.K.] deal adds a new growth engine for CareTrust for years to come,” said Sedgwick in the company’s quarterly conference call on Friday.

The move is noteworthy for reducing CareTrust’s U.S. skilled nursing exposure to 49% of properties and 63% of rental income. The deal adds 134 properties, 15 operators, and $68.6 million in annual rent.

The San Clemente, Calif.-based real estate investment trust (REIT) sought senior housing across the Atlantic due to an opportunity to diversify its portfolio amid a favorable cost of capital, strong balance sheet and strong demographics as well as “supply-demand tailwinds behind our sectors here in the U.S. and in the U.K.,” he said.

Care REIT’s acquisition marks CareTrust’s first M&A deal in the U.K. market. It is also the largest transaction in the REIT’s history. The deal also brings in a seasoned U.K.-based team and offers a purchase price below replacement cost, making it accretive in year one, Sedgwick said.

“We began to believe that because it ain’t broke, we have a unique window of opportunity to do something special. Immediately after last year’s exponential growth, we’ve invested throughout the organization to ensure that the flywheel in the United States does not slow down, and that the U.K, will be additive to our current robust U.S. gross growth engine,” Sedgwick added.

Sedgwick also noted 2024 as a year with record-breaking investment activity, far exceeding its initial expectations.

“About midway through [2024], we started to see a path to more than quadruple that record. So you saw a rapid cadence of deploying capital, issuing equity and reloading the pipeline on repeat throughout the year,” he said.

CareTrust’s outlook on potential Medicaid cuts remains unchanged. The REIT’s executives are monitoring the budget process closely, noting that it was too early to draw conclusions. They highlighted “widespread” ongoing bipartisan support for Medicaid and protecting care for older adults.

During the first quarter, CareTrust posted funds from operations (FFO) of $77.8 million, or 42 cents per share, missing the Wall Street estimate of 43 cents per share.

The REIT’s shares closed at $28.54, down 53 cents, or 1.82%.

U.S. pipeline, mom-and-pops selling

In the first quarter, CareTrust REIT completed three new investments totaling over $47 million at an approximate 10% yield, including skilled nursing, seniors housing, and a mezzanine loan.

CareTrust also acquired a skilled nursing and assisted living campus in Southern California through a $34 million joint venture with a 9.7% initial yield on April 1. The facility is leased to Ensign Group affiliates under a 15-year triple net lease with extension options and CPI-based escalators.

These deals bring year-to-date investments to approximately $82 million at a 10% yield.

Looking ahead, CareTrust executives expect a strong, reloaded investment pipeline of about $500 million, primarily in real estate acquisitions. This pipeline includes a mix of smaller deals and larger portfolio opportunities, excluding the U.K. acquisition of Care REIT and other potential large transactions under review.

“We also continue to look at a healthy flow of inbound marketed opportunities,” said Chief Investment Officer James Callister. “Deals coming across our desk include a consistent flow of both skilled nursing and seniors housing opportunities, and we are seeing a moderate but notable increase in the number of marketed and off-market large portfolio deals on both fronts.”

In terms of the deal activity over the past six months, Callister said it was consistent, reflecting a fiercely competitive landscape.

“There are still the same groups, same amount of capital out there looking at deals,” he said. “If anything, some of the noise has maybe some regionals or mom-and-pops feeling like it’s a good time to sell,” he said. “Pretty consistent buyer pool, same groups, typically at the same deal table.”

CMS Medicare payment rate: ‘Devil in the details’

As far as the 2.8% CMS reimbursement rate for fiscal 2026, Sedgwick said the headline number doesn’t tell the full story, as the actual rate changes vary by facility.

Across CareTrust’s portfolio, the payment increase works out to 2.2%, he said.

“The devil’s in the details. Every facility is going to have its own unique increase based on different variables that go into that,” Sedgwick said.

While a higher rate would have been preferable, it is acceptable, he said. 

“Of course, you’d like it to be more, but it’s fine. None of our operators are concerned about that. It’s kind of in line with historical increases,” Sedgwick said.