‘We don’t live by the quarter’: CareTrust lines up a flood of nursing investment

CareTrust REIT (NYSE: CTRE) has been very active on its investment front this week, announcing $378 million in new investments since June 30 and $268 million in investments made in the second quarter.

Chief Investment Officer James Callister said there was intense competition for acquisitions in the nursing sector as the ongoing recovery and post-COVID-19 outcomes saw more facilities approaching or regaining stability.

“The investment environment for skilled nursing continues to renew itself with a steady stream of interesting and external opportunities coming to the table,” Callister said during Friday’s earnings conference call. The channel now consists of “almost exclusively” skilled nursing opportunities, he said.

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

“The price we pay and the provider we choose should be about providing long-term, high-quality care…we don’t live by the quarter,” Sedgwick said. “The most important decision in any investment is matching the right provider to 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 used for a senior mortgage loan and $43 million for a concessional equity investment in connection with the acquisition of a 37-property portfolio located in the Pacific Northwest. The borrower is a joint venture between a subsidiary of PACS Group (NYSE: PACS) and another large health care real estate owner, CareTrust said in a statement.

The portfolio consists of 21 nursing facilities and 16 senior living facilities in Oregon, Washington, Alaska, Arizona, Idaho, California, Montana and Nevada. The facilities will be operated by other PACS Group subsidiaries.

“Target prices have risen somewhat, but are being held in check by the current capital market environment. Ratings have remained within historical cap rates for skilled nursing facilities,” Callister said.

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

According to a BMO Capital Markets note, funds from operations (FFO) came in at 36 cents per share, up 2.9% from Q2 2023, meeting analyst expectations, while coverage fell slightly.

Acquisitions this year were “very strong” with the REIT “delivering on” promised takeovers.

CareTrust updated its annual 2024 guidance, forecasting diluted weighted average net income of 86 cents to 88 cents per common share, 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 and medium-sized operators

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

“In terms of the regulatory environment, we are seeing more stringent annual regulatory reviews and penalties in some states. In addition, in many states, approvals for changes in ownership are taking longer, and as a result, transactions are being delayed as parties wait for regulatory approval,” Callister said.

He says buyers like CareTrust – those with operational roots and a capitalized, agile and practical position – provide certainty to sellers.

In addition to announcing a $378 million investment, the San Clemente, California-based real estate investment trust (REIT) closed on investments of approximately $268 million in the second quarter.

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

Later on July 30, CareTrust funded approximately $75 million of the loan, and the REIT now owns the entire $165 million loan amount.

The REIT also expanded its relationship with Bayshire Senior Communities by acquiring three facilities in California for $61 million, and entered into a new relationship with operator Yad Healthcare after acquiring five nursing homes in the Carolinas for $81 million.

CareTrust has made another $27 million mortgage loan to the purchaser of two Tennessee SNF nursing homes leased to subsidiaries of Ensign Group (NASDAQ ENSG).

Underperforming Assets, Occupancy Updates, and SNF PPS

CareTrust says the number of underperforming assets remains low and manageable, but several changes are being implemented that will lead to revenue growth in 2025.

“The Midwest SNF portfolio that was listed for sale remains listed for sale today. These changes and divestitures, taken together, will effectively resolve all of the properties that were underpaid this year,” Sedgwick said.

Skilled nursing assets in the second quarter finally exceeded pre-pandemic occupancy levels, while the skilled structure was down slightly year over year, but operators appear to be “stabilizing,” he said. The new normal is significantly higher than the pre-pandemic skilled structure, about 330 beds higher than usual.

Sedgwick said there is still a lot of work to do in the assisted care sector, but the number of beds increased by 280 year over year.

As for the 4.2% increase in SNF PPS Medicare premiums, Sedgwick believes the industry has not yet managed to fend off the effects of inflation.

“Medicare and Medicaid rates, depending on the state, are a few years behind in that math,” Sedgwick said. “The rate increase that we get for fiscal year 2025 is not really based on 2024 in terms of labor inflation — it’s actually more backward looking. I think we could still have a slightly higher rate going forward.”