CareTrust REIT, Inc. Price & Performance (CTRE)

A replay of this call will also be available on the website for a limited period. On the call this morning are Dave Sedgwick, President and Chief Executive Officer Bill Ladner, Chief Financial Officer and James Hollister, Chief Investment Officer. I'll now turn the call over to Dave Hedwig, AirTrust REIT's President and CEO.

Thank you, and good morning, everyone, and thank you for joining us as we kick off what we hope to be another very strong year at CareTrust.

It's worth stepping back to consider the broader macro environment. A couple of years ago when the Fed raised interest rates more aggressive financial markets and the REIT sector in particular face serious challenges However, because we had driven down leverage and built up our dry powder, we were uniquely positioned to capitalize on a window of opportunity that opened and continues open to us today. The elevated rates drove many banks and investors to the sidelines and drove more and larger deal flow our way. We maximized the opportunity by recalibrating the team deepening strategic relationships, and working flat out resulting in $1,500,000,000 of investments essentially match funded with $1,500,000,000 of equity issuance from both the ATM and a follow on offering. The full effect of last year's activities will result in meaningful FFO per share growth this year without any new investments Today, we are one of the rare REITs that is largely indifferent to a higher for longer outlook. If rates come down, we will certainly benefit. But if they don't, our balance sheet, our portfolio, our access to capital, the opportunity set in front of us and our team are all in a stronger position today than we were going into 2024.

Our mindset to maximize the window neither has our underwriting discipline that has made our portfolio secure and resilient. We do not grow for the sake of growth We remain laser focused on long term FFO per share growth. For us, that will always only be achieved by matching the right operators with the right opportunities and setting them up for success our view, the right operators are those who first take care of their employees so that their employees take care of their residents and patients and loved ones. With respect to those operators in our portfolio, we continue to enjoy exceptional lease coverages. Overall, at 2.82 times EBITDARM and 2.21x EBITDAR Our top 10 tenants, which account for approximately 80 are covering at 3.02 times EBITDARM and 2.37 times EBITDAR.

Furthermore, looking at the many acquisitions made last year, the early performance is in line with expectations. The operating environment in general continues to stabilize. With most parts of the portfolio at or ahead of pre pandemic occupancy skilled mix and coverage. Of course, there's some noise and speculation about what the new administration means for [indiscernible] It's too early to be definitive but our conversation with policymakers, lobbyists, operators all leads us to believe that the minimum staffing rule will be reversed and on Medicaid and Medicare will continue to be unchanged as the cornerstones of healthcare in general and skilled nursing in particular. Our operators continue to post barrier star ratings and quality measures compared to the industry at large and to their respective state averages as well. We count ourselves truly blessed to be able to associate some of the best operators in the country and we can't thank them enough for all they do for their employees, patients and residents not to mention the security and tailwinds they provide us and our investors. With this solid foundation, we are poised for another year of significant external growth if deal flow is even close to last year.

On January 1, we effectively woke up to double digit FFO per share growth on a run rate basis without accounting for any additional investments. But we are absolutely not resting on last year's records. We continue to execute our long term strategy and zealously pursue James will provide color on the pie I'll just say this, I've never been more excited about our current trajectory and potential for growth. If you liked, our story last year, I think you're going to love Chapter twenty twenty five. James? Good morning, everyone. $1,500,000,000 at an estimated stabilized yield of 9.7%. These investments were reflective of a strong and consistent pipeline of activity throughout the year. The investments range in size from one facility to 46 facilities from less than $5,000,000 to over $450,000,000 from real estate acquisitions to acquisition financing mezz lending and preferred equity investments.

We finished off the year with what is for us an unprecedented quarter of investment activity with every department in the company putting an impressive effort to close approximately $700,000,000 of new at an estimated stabilized yield of 9.9%, During the quarter, we added 81 triple net facilities to the portfolio along with several new operators. Subsequent to the fourth quarter, we have closed on approximately $26,800,000 of additional investments at a yield of 10.6%. These investments include the acquisition of the twenty eighth and final facility related to the large Tennessee transaction previously announced in December at an initial contractual lease yield to CareTrust of approximately 9%. We also funded approximately $6,400,000 under a mezzanine loan related to a small portfolio of skilled nursing facilities in Maryland at an initial yield of 13.2%. Our investment pipeline moving forward continues to be robust as we look to continue twenty twenty four's momentum into 2025. Reloaded pipeline today sits at approximately $325,000,000 of real estate acquisitions and consists of some singles and doubles as well as some mid size portfolio transactions. Not included in our quarter pipeline are a couple of larger portfolio opportunities. The pipeline primarily consists of skilled nursing facilities, but also includes seniors housing.

Are actively pursuing under our current underwriting standards. And then only if we have a reasonable level of confidence that we can lock them up and close them within the next twelve months. We continue to look at a healthy flow of marketed opportunities as well as off market deals brought to us by existing operators and other relationships, including relationships garnered through our decision over the past Our primary focus has always been and will remain on sourcing and executing on accretive real estate acquisition opportunities. With that said, we expect to continue to receive inbound requests for loans and will selectively pursue lending opportunities that we feel will lead to attractive real estate acquisitions in the future with best in class operators. As we turn to 2025, a consistent flow of inbound opportunities both marketed and off market, has us feeling highly optimistic with our built up team, our 2025 investment The combination of our access to capital, of focused on accretive transactions with quality operators and the strong ongoing demand for post acute and senior care provide an ample runway for pipelines of future growth during the coming year. With that, I'll turn it over to Bill.

Thanks, James. For the quarter, normalized FFO increased 68.1% over the prior year quarter to $72,900,000 dollars and normalized FAD increased 63.7% to $74,300,000 On a per share basis, normalized FFO increased $0.04 or 11.1% to $0.4 per share and normalized FAD also increased $0.04 to 10.8% to $0.41 per share During the fourth quarter and in order to match fund our previously announced robust pipeline, We closed on an overnight offering raising net proceeds $487,000,000 at $32 per share which pre funded the November and December investment close.

As of today, we have $180,000,000 of cash after funding those investments and after funding January and February investments, and after receiving the tenant purchase option exercise that closed on February 1 of $44,000,000 dollars and also after making our dividend payment, which is now roughly 55,000,000 In yesterday's press release, we initiated guidance for the year with normalized FFO per share of $1.68 to 1.72 and for normalized FAD per share of $1.72 to $1.76 This guidance includes all investments made to date, a diluted weighted average share count of 187,500,000.0 shares and also relies on the following assumptions.

One, no additional investments nor any further debt or equity issuances [indiscernible] [indiscernible] CPI rent escalations of 2.5%. Our total cash rental revenues for the year are projected to be approximately $279,000,000 Not included in this number is the amortization of lease intangibles that will total about $3,500,000 but this will be in the rental revenue number as required by GAAP.

Three, interest income from financing receivables of $11,500,000 Included in this number is $9,000,000 of cash and $2,500,000 of non cash revenue for GAAP purposes that is subtracted in the FAD reconciliation. [indiscernible] interest income of approximately $84,000,000 The $84,000,000 is made up of $76,000,000 from our loan portfolio, and $8,000,000 is from cash invested in money market funds. Five, interest expense of approximately $21,300,000 Interest expense also includes roughly $4,000,000 of amortization of deferred financing fees and six, G and A expense of approximately $30 and includes about $11,700,000 of deferred stock comp. This guidance represents a range of FFO per share growth of 12% to 14.6% and on FAD per share of 11.8% to 14.4 without any additional investments. Our liquidity continues to remain strong In addition to cash on hand, we have 1,200,000,000.0 available under our new revolver, which closed in December.

Leverage continues at a store close with the net debt to normalized EBITDA ratio of 0.5 times.

Our net debt to enterprise value was 3.5% as of quarter end and we achieved a fixed charge coverage ratio of 17 times.

Lastly, towards the end of Q4 and into Q1, we have seen the cost of our equity increase while the cost of our new revolver has decreased to where it may make sense to begin utilizing our new large credit facility, and then decide how we want to term out those draws.

We still love having all options on the table with respect to financing, a robust pipeline. And with that, I'll turn it back to Dave.

Great. Well, we hope the report has been helpful and happy to take your questions now.

At this time, Your first question comes from the line of Wes Golladay from Baird. Please go ahead. Your line is open.

Hey guys. Looking at last year, Pat's was a big driver of the investment activity, really strong year.

When you look at the pipeline now going forward, do you see that start to broaden now And more specifically, the portfolios that the larger portfolios would those be with new operators?

Yes. I think this I think what you'll see this year is what you've seen from us in the past, which is expanding with existing operators and probably adding some new ones. With respect to large portfolios, those are kind of too early to to really talk about at this point.

Okay, thanks. Your next question comes from the line of Farel Granas from Bank of America. Please go ahead. Your line is open. Hi, good afternoon. Thank you for taking my question. Did have another question about PACS going forward. I was wondering if you could make some commentary on your conviction as well as is there any bad debt associated within your guidance either to either offset if there were to be an outcome on their current situation.

No, there's no bad debt at all in our our guidance and we certainly don't expect any [indiscernible] or any of our operators this year. And so with respect to PAX, it's It's too early to really make any comments before they are able to release their results. So we'll wait for that and We just point you to the exceptional lease coverage that we have in place with and hope to hear from them soon.

Great. And just one more from me. Just in terms of your pipeline, where are you seeing cap rates either shift? And are you seeing any compression going forward? [indiscernible] are really staying where they always have for skilled nursing in the 12.5 to 13.5, I would say somewhere in there and it remains consistent with yields and somewhere in the nine to 10 range.

On seniors housing, maybe a little bit of compression, but Nothing that's all that notable at this point. [indiscernible] Okay.

Thank you very much. Your next question comes from the line of John Kielychalski from Wells Fargo.

Please go ahead. Your line is open.

Good afternoon. Thank you. Maybe Bill, if we could start with your last comment that you made on the call before we turn it over to Q and A. You said your cost of debt is becoming a little bit more attractive here and that cost of equity has creeped up. Could you give us some sort of guardrails on actual numbers around the calculus of what you're looking at here? And maybe a more definitive answer so we could understand in our models how you're thinking about it?

Sure. Well, I'll begin with, we have a stated range of net debt to EBITDA of 4% to five times Obviously, if we draw the revolver, we have a long way to go to get to that range.

I think depending upon our investment pipeline, the quoted pipe, and then call it the the funnel to the pipeline. It all depends on how that investment [indiscernible] as to how we will either use our revolver or issue equity under our ATM. If we see a lot of deals at yields that call it what they were last year I still think it makes sense to use a portion to fund using equity But again, it's a decision that based on what we see beyond our quoted pipe.

Got it. And then maybe if I might jump over to Medicaid here. And Dave, you made this comment earlier where there's a great sense of confidence that these discussions around Medicaid and Medicare or Medicaid cuts and fraud investigations won't hit you all. So maybe one on the Medicaid side, what gives you the confidence to say that if there were to be cuts, where do you think they would be? And again, why do you think that they would not sort of touch the SNF space?

Well, It's really just too early to be like I said in my prepared remarks, very definitive on it, But if you If you read what House Speaker Johnson said just a couple of days ago, and you take him at his word and what President Trump has recently said about Medicaid We have I think we would say we'd have more reason to believe that it will not be touched Speaker Johnson, just Tuesday said Medicaid has never been on the chopping block and that they're just looking for fraud, waste and abuse, which course, we would we would applaud as well They have there's bipartisan support for Medicaid as it is today and you have a Trump administration who in the first administration was incredibly supportive to the skilled nursing space. And we expect that same type of understanding of the importance of Medicaid and the bipartisan support for it to continue.

Got it. Thank you.

Your next question comes from the line of Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead. Your line is open.

Great. Thanks. Bill, just want to go back to your answer to the last question and also your comment in the prepared remarks about the source of funding kind of will depend on the pipeline in front of you. [indiscernible] the pipeline today at $325,000,000 is somewhat larger than maybe the average it was at various periods last year. Points in time and the team still seems very bullish on opportunities ahead. But mean, should we take the comments about may make sense to use the credit facility in the near term and term that out as any sense that there's an air pocket in deal activity immediately in front of you and that then you'll take it in stride? As the year progresses and you have a little better visibility?

Well, as it relates to the quoted pipe, 300 plus million First, we'll use cash on hand.

So that's going to take out a large portion of that.

I don't think we see right now any air pockets in our investment pipeline it continues as it did last year to replenish So that gives us so that causes us pause each time we go to sign up a deal as to how we want to invest it, how we want to fund it. Right now, we do like the price of our equity. And I would say we would continue to fund using equity. But having that revolver come down in pricing relative to the cost of our equity causes us a little more pause unlike last year, to possibly maybe use that to [indiscernible] That's helpful. And then maybe just for the team or whomever, does the fluctuations in your stock price, I mean, you referenced you still like the cost of the equity Does that change how aggressive you'd be on more of the call them value add investment opportunities where you were willing to maybe take a lower initial lease yield with potential upside in the coming years. Does that sort of change the sandbox, if you will, that you're playing in on the types of deals that are attractive to you today?

No, it doesn't. I think we underwrite each deal on its own and we get the right risk adjusted returns that the deal presents Thanks, Austin.

Your next question comes from the line of Mike Carole from RBC Capital Markets. Please go ahead. Your line is open.

Yes, thanks. Just talking about, I guess, deal volume, I mean, how should we think about the [indiscernible] It looks like the pipeline today is fairly similar to what it was the end of twenty twenty four. Is that just due to like normal seasonal patterns of sellers trying to rush to sell before the end of the year? Or has there been a pause of activity due to the macro uncertainty? I mean, how should we think about that cadence over the last two months or so?

Yes. Mike, I'll take this, James. I mean, I don't think there's been a pause in the cadence. I don't think that we see much of a change in deal flow. It still remains healthy. We still see deals coming in really weekly. So I think that If anything, you see a rush of closings towards the end of the year as deals you've been working under in the year kind of start to having to come to a head and get done and tax planning etcetera. But I don't think we've seen a meaningful shift in cadence of deal flow coming across our desk In the last six to twelve months, it's been healthy and consistent.

Okay. And then James, can you provide deep details on the recent acquisitions, I guess the ones that you're transitioning new operators and you're banking on them stabilizing. And I mean, general, over the past eighteen months, have they performed in line with your expectations? [indiscernible] 14%, 15% type coverage ratio? Yes. I mean some of them it's just too early, Mike.

Right? I mean Tennessee in particular, it's just too early really to see that from when they got into now. We just don't have a full set of financials probably that really would show that.

But on the whole, I would say, yes. And I think that We don't have any reason to believe they're not on track to get where and when we've stabilized them going. And I would add that a key part of the equation in the risk adjusted return as well as the credit And The lower coverage going in the more credit we're going to insist on and as of right now, we see those performing as projected.

Okay.

And then when should we expect to see those coverage ratios start to kind of click into the sub and I guess I'm specifically looking at length. And I mean, great if you could talk about it, but I know it's one specific operator, so you might not want to give us too many details. But I mean, I think the first four buildings required in what mid 2023, I mean, will that start to roll on to the sub sometime in 2025? Mike, probably not because Links in particular you might recall, we gave them think, a two year ramp [indiscernible] their rent to get to stabilization And so that one in particular had a longer lead time than others. When we acquire new facilities, and we bring in new operators, We give them the time they need to wrap their arms around the buildings, get them seasoned and stabilized before we start putting that in this up.

Okay. So for Lanes, you'll give it to us in year three, so which would be 2026 to give us the trailing number for that?

I would expect so, yes.

Okay.

All right, great. Thank you.

Your next question comes from the line of Juan Sanobria from BMO Capital Markets. Please go ahead. Your line is open.

Hi. Good morning.

Just hoping you could talk a little bit more about the pipeline kind of mentioned senior housing a couple of times. So just curious if there's any more appetite on the senior side if we're seeing more deal flow there And would that include SHOP, which I know you've kind of talked about previously and and just as the last little bit of that cap rate expectations for the seniors housing piece of the transactions pipeline? Yes. Thanks, Juan.

Yes, I think we've been We've been really interested in looking at seniors from a shop perspective. Call it for the last couple of years. And I think that interest remains and it's all going to just come down to finding the right entry point If we can find it, Historically, we've always done some seniors housing just about every year, which has kept the concentration where it has been throughout our ten years. We've done some triple net As you know, [indiscernible] And but it remains to be seen. We really have to find that right entry point to go into the shop space.

Okay, great. And then just going back to Medicaid and political uncertainty, one of the avenues being discussed is just pulling back on Medicaid expansion how do you think that would play through and or impact skilled nursing if that were to come to fruition just to play out that scenario whether or not it happens or not. It kind of [indiscernible] Yes, I would not view if that's the direction that it goes, I would not view that as a serious concern for skilled nursing. I think the bulk of that expansion was [indiscernible] younger able-bodied folks who were added to the Medicaid roles and if that gets if they throw a work work requirements and different eligibility requirements, that I would not expect that to hit skilled nursing. Thank you very much.

All right.

Your next question comes from the line of Rich Anderson from Wedbush. Please go ahead. Your line is open.

Hey, thanks. So your comments around PACS, I appreciate that. You had a sort of a follow on kind of completion in 2025 with them.

One facility. But I'm just curious what your appetite is to do work with them at this stage given the uncertainty around them. Would you be open to doing a deal with them today? Or are you sort of in a holding pattern?

As it relates to your external growth?

I think packs and sales are probably a bit of a holding pattern until they can release earnings. And I think it will wait to see how that how that earnings release comes out and and hope that it's a positive one.

Okay, fair enough. And then on your shop comments, if so, if you were to sort of get something moving in that direction, where do you see it executing? Would it be acquiring an enterprise that has the people and process in place or would you build it organically?

I think it's still to be determined. I think you could all options would I would say around the table with for the same reasons why skilled nursing is such a strong place to be. The demographics are just incredible. And the next five years from now, it's projected that there will be more than 4,000,000 more people aged 80 years or older So that that long anticipated silver tsunami appears to now be breaking And so the demographics and the supply and demand it's It's obviously a very compelling area that we're very familiar with. On the skilled side and a lot of that leads over to the the shop side. Okay. And then just one last one for me. In your $1,500,000,000 of investment last year, How much of that was sort of the normal course replenishment your visible pipeline, which is today three twenty five. And was there any amount in that $1,500,000,000 that would be larger portfolios that were in addition to what you characterize as your pipeline. I'm just curious as to the makeup of the 2024 external growth platform and how that might be extrapolated into 2025 in terms of deal volume?

Yes. So the way we handle the the pipe is we quote a number that we have a very high amount of confidence in. It certainly is not inclusive of everything that we are underwriting or reviewing or chasing either. The bigger the deal, the higher the threshold that we have on it. Before we include it in the number. So as the year went on, we were certainly working on for example, the Tennessee deal, Right.

Throughout the year, but we were not including that until we really had to. Because it was that certain we were going to get it done.

And so we announced what we feel very confident in We execute and we replenish that five as we stated replenished voted pipeline as deals either closed, fall out or or get replenished.

So of the $1,500,000,000 last year, is it fair to say that 50% of it was this sort of replenishment movement and 50% was stuff that wasn't in that pipeline, but ultimately worked out like in the case of Tennessee, is that a reasonable breakout of what happened last year? No, I don't think so. I think if you roll back the tape, you'll see you'd have to go back to each time that we updated Our pipe number and compare that with what closed and And then I would say probably that the Pennsylvania I'm sorry, the Tennessee deal was the one that would not have been included in sort of run rate quoted pipe because we really did wait until that thing was was signed up and it was a material investment which required us to disclose it.

So I think the sign if you factor that if you take that one out maybe from the quoted pipe numbers along the way that might give you a better read Okay.

You bet. Thank you.

Again, should you have a question, Your next question comes from the line of Omotayo Okusanya from Deutsche Bank. Please go ahead. Your line is open.

Yes. Good afternoon, everyone. Just curious on the Medicaid side, from the state perspective as they start to gear up for their for their yearly budget. Are you kind of any early indications of what might be happening in terms of just Medicaid reimbursement at the state level in the key states you have exposure to?

We don't expect any negative surprises on that front.

Based on what we've heard from our operators. There's some just to give you one little piece of color. There is some building optimism that Texas will see a fair size increase which would obviously be very welcome news to that state that is historically been underfunded But we've also been disappointed by that type of hope in Texas before too.

So besides that, I think we're expecting it to be a pretty routine season with respect to Medicaid rate.

That's helpful. And then I guess sticking to the Medicaid conversation, again, I appreciate all the color you've put on how the government may be kind of thinking about it. But I do think one other popular theme is this idea of the government just kind of pulls back on the amount of kind of Medicaid matching they're doing and they ask the states to be much more responsible for it. And any thoughts around that line of thinking about how you could see potential evolution of Medicaid And on the Medicare side, also a lot of thoughts around they start to push much more Medicare Advantage versus traditional Medicare And I think again with Medicare Advantage, the reimbursement rate tends to be lower to the operator. So again, just any thoughts on those kind of two thoughts around how the Trump administration may attack this?

Sure. And I'll go in reverse order. I think the trend is certainly not the industry's trend with respect to managed Medicare. That trend has been in place for gosh, I've been in the business twenty five years and it's been part of the discussion this whole time. And that's going to I don't expect that to reverse. I think that trend will continue and Medicare Advantage will continue eat into regular fee for service Medicare. And so then that what I'm about? Historically and going forward is the same as true is that the more adjust to that. They're able to invest in those relationships with the managed care organizations and gain share [indiscernible] So yes, it's challenging and there's lower length of stay you can actually capture some share. And if you're really sophisticated, you can net net not due too poorly from that. With respect to the FMAP, I guess just spitballing, you've got A house that does not have nearly the majority that it had during Trump one point zero, and in the first administration, President Trump ran on building the wall and repealing Obamacare. Healthcare reform, and they were unable to pass any of these types of approaches to chip away at the Medicaid rates And now you have a fairly razor thin majority And so as they as they look at that, I think you're going to have the same type of opposition with much less room for error by in the house and but also those Republican governors are not interested in having taking on more of that burden There's just no room really to cut for Medicaid for skilled nursing and I think the states and the federal government are more aware of that today than they ever have been based on what happened with the pandemic. [indiscernible] Just around packs, again, I know it's a bit of a black box today.

But how do you guys kind of think about a worst case scenario as it pertains to kind of the current federal investigation just given as you guys are kind of handicapping this thing, like worst case scenario is what in your mind?

No, we don't really want to speculate on that. In this forum. We don't have a worst case scenario that we're concerned about right now. We think that they're going to be just fine and we really don't have much more to comment before they themselves are able to come Fair enough.

Thank you.

You bet. I will now turn the call over to Dave Sedwick, Chief Executive Officer for closing remarks.

Well, thank you guys very much for your interest in support. Look forward to another very strong year here at CareTrust. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.