CareTrust REIT, Inc. (NYSE:CTRE) Q1 2023 Earnings Call Transcript May 11, 2023

Operator: Good day. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the CareTrust REIT First Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Senior Vice President, Lauren Beale. You may begin your conference.

Lauren Beale: Thank you and welcome to CareTrust REIT’s first quarter 2023 earnings call. Participants should be aware that this call is being recorded and listeners are advised that any forward-looking statements made on today’s call are based on management’s current expectations, assumptions and beliefs about CareTrust’s business and the environment in which it operates. These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financings and other matters and may or may not reference other matters affecting the company’s business or the businesses of its tenants, including factors that are beyond their control, such as natural disasters, pandemics such as COVID-19 and governmental actions.

The company’s statements today and its business generally are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied herein. Listeners should not place undue reliance on forward-looking statements and are encouraged to review CareTrust’s SEC filings for a more complete discussion of factors that could impact results as well as any financial or other statistical information required by SEC Regulation G. Except as required by law, CareTrust REIT and its affiliates do not hesitate to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances or for any other reason. During the call, the company will reference non-GAAP metrics such as EBITDA, FFO and FAD or FAD and normalized EBITDA, FFO and FAD.

When viewed together with GAAP results, the company believes these measures can provide a more complete understanding of its business, but cautions that they should not be relied upon to the exclusion of GAAP reports. Yesterday, CareTrust filed its Form 10-Q and accompanying press release and its quarterly financial supplement, each of which can be accessed on the Investor Relations section of CareTrust website at www.caretrustreit.com. 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 Wagner, Chief Financial Officer; and James Callister, Chief Investment Officer. I’ll now turn the call over to Dave Sedgwick, CareTrust REIT’s President and CEO.

Dave?

Dave Sedgwick: Good morning, everyone and thank you for joining us. Before handing the call over to James and Bill, I’ll address three topics: investment activity since our last call, a portfolio update and some thoughts on the regulatory environments. First, back in November, we talked about how we anticipated that more deals would be steered our way as sellers grow frustrated with delays and retrades due to the tighter credit markets. Today, we are pleased to report that that increased flow of deals has occurred and has begun to result in exciting new investments for us. Since our last call, we have successfully closed on three transactions, totaling 3 skilled nursing and 2 seniors housing facilities for a combined $47 million.

The stabilized blended yield for these deals comes in at 9.6%. And as meaningful as these investments are to the company this year, maybe more importantly, these deals officially start three new relationships with operators, we believe, will not only improve the lives of employees, residents and patients at these facilities, but also fuel future growth opportunities for CareTrust. The pipeline today sits at between $150 million to $200 million. Second, the existing portfolio is overall in very good shape. Since the very start of the pandemic, we expanded the way we report coverage to three views: pre-pandemic, excluding provider relief funds and amortizing provider relief funds through their eligible periods. Excluding the relief funds, trailing 12 property level EBITDAR coverage for the portfolio through December 2022, remained strong overall at 2.01x compared to the 12 months leading up to September 2022.

Last quarter, I gave more color around one skilled nursing operator, not in our top 10 with negative lease coverage that accounted for roughly $5 million of contractual rent. At the time of last year – last quarter’s call in February, they had not paid rent since November of 2022 and had very recently terminated their CEO. Since then, they have made a full rent payment in March, a partial rent payment of $100,000 in April, and thus far, no rent in May. They replaced their CEO just last week and we are talking through all options with them. We are striving to determine the best path forward for this portfolio as soon as possible since its status is still one of the main things keeping us from issuing guidance. As to the dispositions and transitions, I am pleased to report that we have made progress since our last call.

Of the retained facilities, we transitioned to Wisconsin assisted living facilities from Noble Senior Services to the Pennant Group. Wisconsin is a region of strength for Pennant and they are working closely with the Department of Health to obtain licensure and have begun meaningful improvements to turn those two facilities around. Also since our last call, we have sold one small seniors housing facility that was previously counted as held-for-sale for approximately $3 million. Finally, on the regulatory front, our operators have been preparing for the end of the public health emergency, which expires today, potentially impacting some operators while being essentially a nonevent for others. Additionally, the public health emergency has implications for the Medicaid rate as the 6.25% add-on from CMS winds down by the end of the year.

We are, for the most part, encouraged by the steps many states have taken to permanently address the increased cost of care for operators due to the pandemic and the subsequent high inflation. My last issue for the regulatory environment relates to the proposed minimum staffing requirement from the Biden administration. As we sit here today, there is still a lot that is unknown, but it is generally believed that despite the severe staffing crisis in healthcare generally and skilled nursing specifically, some form of staffing requirement will be issued. The industry is working hard to educate regulators in DC on what a requirement could inflict on operators and what conditions would make said requirement manageable, things like additional funding or employment rate hurdles or a phased timeline, etcetera.

We are hopeful that the time CMS is taking is evidence of them weighing seriously the realities on the ground that are being shared with them. So heading into June, we are really pleased with the progress made to date toward our main priorities for the year, namely returning to asset acquisitions, sourcing more off-market deals, expanding our operator bench, increasing the dividend and further derisking the portfolio through active asset management work, all while maintaining a leverage profile that provides tremendous flexibility in a challenging market. With that, James will talk to you about our recent activity and pipeline.

James Callister: Thanks, Dave and good morning, everyone. As Dave mentioned, this year, we are off to an exciting start with approximately $47 million in new acquisitions, consisting of 3 transactions, 5 facilities and 3 new operator relationships. At the end of Q1, we closed on a 280-bed two facility skilled nursing portfolio in Texas and Kansas. We paid approximately $17 million for the portfolio with the Texas facility being a tack on to our existing master lease with momentum skilled services and the Kansas facility being leased to Summit Healthcare Management, a new operator for us. Combined stabilized annual rent for these facilities is approximately $1.69 million. Next, earlier this month, we have closed two transactions with each starting a new operator relationship.

First, we acquired a 148 bed skilled nursing facility in the Atlanta metro area for approximately $12 million and leads to the same to the Elevation Group. An operator founded by Brothers Ken and Dan Funk two industry veterans with many years of combined experience operating skilled nursing facilities. The annual rent for this property is approximately $1.14 million. We followed the Atlanta closing by acquiring a 136-unit two-facility memory care portfolio in the Chicago area for approximately $18 million. We leased these buildings to chapters living a Midwest-based memory care operator in its early growth stage and co-founded by Danny Stricker, an experienced leader in the senior housing industry. The initial annual stabilized rent for chapters is $1.7 million.

These transactions reflect what is one of our top priorities this year, a return to acquisitions. Given the current lending environment, we continue to opportunistically pursue actionable deals where we feel our access to capital, low execution risk and reputation of the quality transactions partner make us a particularly attractive buyer. A sustained return to acquisitions requires that we not only deepen and expand our relationships with the best-in-class operators that make up our operator bench, but we also requires a commitment of resources and efforts to actively seek out prospective operators that we can confidently grow with in the future. Last year, we allocated some internal resources to enhance our focus on expanding our network of prospective tenants.

We are seeing that commitment of resources payoff with the addition of these three new operators this year. As you may recall, last year, we also strategically provided some debt financing. In part as a means of establishing relationships with operators we had admired from a distance. Our purposeful relationship-based lending program in large part yielded the opportunity to acquire Georgia facility, by utilizing connection we made as part of one of the loans we extended last year. We are gratified to see last year’s move to strategic lending activities already begin to bear fruit in our current pipeline of acquisition opportunities. As Dave referenced in his comments, deal flow remains strong. Most incoming transactions consist of between one and four facilities with only a small number of larger portfolios hitting the market.

We are seeing sellers continuing to divest non-strategic assets. We also continue to see a number of inbound transactions with facilities that are in some stage of operational distress. Unable to make debt service under variable rate loan obligations are facing maturity date risk. We see some motivated sellers adjusting pricing expectations as more highly leveraged buyers remain somewhat on the sidelines given the bank’s continued tightening our lending activities. We remain optimistic that we can continue to source accretive transactions over the coming quarters. And with that, I’ll turn it over to Bill.

Bill Wagner: Thanks, James. For the quarter, normalized FFO decreased 2.4% over the prior year quarter to $35 million. Normalized FAD decreased by 3.5% to $36.6 million. On a per share basis, normalized FFO decreased $0.02 to $0.35 per share and normalized FAD also decreased $0.02 to $0.37 per share. Rental income for the quarter was $46.2 million compared to $47.7 million in Q4. The decrease of $1.5 million is due largely to the following four items: the first two of these items were discussed on last quarter’s call. First, we received approximately $1.2 million less of cash rents from tenants who are on a cash basis. $700,000 of which related to exhausting the security deposit of the negative coverage tenant in Q4. Second, we received approximately $1.1 million less cash related to a prior tenant in Q1 than in Q4.

This $2.3 million decrease was offset by third, an increase in rents from CPI bumps of $319,000 and fourth, a write-off of a straight-line rent receivable of $440,000 in Q4, but none in Q1. Interest income was up $308,000 mainly due to a fee paid on a $15 million note that was paid off at the end of Q1 as a result of the payoff I would expect interest income to be more like the Q4 number less $500,000, which was the quarterly interest on the $15 million note. Interest expense was up $219,000 from Q4 due to higher interest rates, offset by lower borrowings under the revolver. Subsequent to quarter end, we drew $30 million on the revolver for acquisitions. G&A expense increased $248,000 from Q4 due to higher short-term incentive compensation, offset by lower stock compensation and other corporate-related items.

The big decrease in stock compensation is due to stock forfeitures that occurred when Mark Lamb left the company. I would expect stock compensation to return to a quarterly run rate of around $1.5 million. Even with that increase, G&A expense for the year will be around $21 million. Cash collections for the quarter came in at 96.3% of contractual rent. And in April, we collected 97.5%. We didn’t issue any shares under our ATM program this quarter, but after quarter end, we entered into a forward sale and have to date issued approximately 1.8 million shares at an average gross price of $19.91 before we enter the blackout period. As a result, our liquidity remains extremely strong with approximately $25 million in cash and $435 million available under the revolver.

Leverage also continued to be strong with a net debt to normalized EBITDA ratio of 3.8x, which is below our stated range of 4x to 5x. Our net debt to enterprise value was 26% as of quarter end, and we achieved a fixed charge coverage ratio of 5x. Lastly, we had hoped by this time, we would have reinstated guidance as we have done in past years. We expect to begin issuing guidance once we have made sufficient progress with the previously discussed portfolio repositioning work. And with that, I’ll turn it back to Dave.

Dave Sedgwick: Thanks, Bill. We hope our report has been helpful, and thanks for your continued interest and support and be happy to take your questions now.

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Steven Valiquette with Barclays. Your line is open.

Operator: Your next question comes from the line of Jonathan Hughes with Raymond James. Your line is open.

Operator: Your next question comes from the line of Austin Wurschmidt with KeyBanc. Your line is open.

Operator: Your next question comes from the line of Michael Carroll with RBC Capital Markets. Your line is open.

Operator: [Operator Instructions] Your next question comes from the line of Tayo Okusanya with Credit Suisse. Your line is open.

Operator: There are no further questions at this time. I will turn the call back over to Dave Sedgwick for closing remarks.

Dave Sedgwick: Well, I really appreciate everybody’s time and continued interest. If there is anything else, please give us a call. Otherwise, we will see many of you in New York at NAREIT in June. Have a great day.

Operator: This concludes today’s conference call. Thank you for attending. You may now disconnect.