CareTrust REIT Inc (CTRE) 2022 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the CareTrust REIT's Second Quarter 2022 Earnings Call. (Operator Instructions)

I would now like to turn the call over to your host, Lauren Beale. You may begin.

Thank you, and welcome to CareTrust REIT's Second Quarter 2022 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 elections 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 undertake 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 F-A-D, 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's 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; Mark Lamb, Chief Investment Officer; and James Callister, Executive Vice President.

I will now turn the call over to Dave Sedgwick, CareTrust REIT's President and CEO. Dave?

Thank you, Lauren, and good morning, everyone. Today, we'll give you an update on the progress we are making on the announced dispositions and on our current outlook for new investments. With this quarter's supplemental, we began to preview what the portfolio will look like after the dispositions or re-tenanting work is complete by excluding those properties and tenants from the deck.

But before I hand the call over to James, Mark, and Bill, let me comment on the extraordinary time in which we live and operate. Since we announced plans in February to de-risk the portfolio, the world has changed quite a bit for us and for our operators. Surge in inflation, rising rates and daily talk of a recession have an impact. But for us and skilled nursing operators, it's not all headwinds.

For our disposition work, yes, the motivation and ability of some buyers in the market has softened, particularly those dependent on lenders. That's okay. We adapt and run parallel paths of selling and re-tenanting and, ultimately, we'll end up with a substantially de-risked portfolio. We're on track to close on most of that work in Q4.

For our investment activity, as rates continue to rise and lenders become more cautious, we would expect a couple of things to tip in our favor when it comes to growth. First, pricing should moderate. And second, sellers should prefer the certainty buyers like ourselves present. We're seeing evidence of that just in recent weeks.

Now as for how today's macro-environment affects our operators. Again, there are 2 sides to that coin. On the one hand, the persistence of COVID and inflation and a tight labor market make today, at time, unlike any of us can recall. The best operators truly distinguish themselves during times like this. Historically, skilled nursing has been a net beneficiary from recessionary periods because as the labor market loosens, people come back to work.

Now looking at the portfolio. We reported 94% of rent collected in the quarter with cash deposits. And as for July, we collected 94% exclusive of any cash deposits. August collections appear to be in-line with July. Average quarterly occupancy for skilled nursing operators grew by 1.4% or 98 basis points over Q1. And for seniors housing, occupancy grew 2.8% or 215 basis points over Q1.

Now as for the regulatory environment, we were encouraged to see the final market basket adjustment from CMS come in better than expected at 2.7%. And we're also pleased to see CMS decide to recalibrate PDPM over 2-years instead of all at once.

With that, I'll turn it over to James to update you on the disposition progress.

Thanks, Dave. We continue to actively work on selling, re-tenanting and repositioning certain assets in an effort to fortify the portfolio. Since our earnings call in February, the acquisition/disposition market for skilled nursing and seniors housing facilities has been in the state of change as lenders consider tightening or pulling back on lending due to concerns of a possible recession.

Despite the changing circumstances, during Q2 and since, we have made meaningful progress on pushing our planned dispositions forward. We have entered into a purchase and sale agreement to sell the skilled nursing portfolio that we have brought to market. We've also signed up several letters of intent and as a result, are well into the negotiations on several purchase and sale agreements. We're also negotiating several LOIs and currently, we continue to regularly receive written offers from potential buyers that we are considering and evaluating.

As Dave mentioned, in some cases, we have adapted and are pursuing parallel paths of selling and re-tenanting with the same ultimate destination in mind, a substantially de-risked portfolio. We remain on track to close and wrap up much of the disposition work by the end of Q4, and we'll provide updates to you as deals further solidify.

With that, I'll turn it over to Mark.

Thanks, James, and good morning, everyone. In Q2, we closed on a $75 million "C" piece, which is secured by a large portfolio of skilled nursing facilities located in the Mid-Atlantic at a rate of 8.4% in a term of 5-years. As part of the transaction, we also originated a $25 million mezzanine loan that bears a rate of 11% for 10-years.

This past Monday, we closed on a $22.3 million "B" piece, secured by 5 California skilled nursing assets. The loan is a SOFR-based rate with a floor of 8.5%. These fundings bring our 2022 year-to-date in total of $144 million at an average of approximately 9%.

Looking to the market, we've seen an uplift in our bread-and-butter acquisition opportunities for skilled nursing facilities. Seemingly as the debt markets tighten up and in some instances, sellers are looking to buyers that have the ability to check for the acquisition. We view this as a shift in the market to prioritizing certainty of close, the position that REIT's have not enjoyed for some time now.

Despite these shifts, we are very careful to underwrite in value assets in today's market as we need to ensure the fundamentals at the facility level are in place, or have the ability to reach the necessary key factors for our operators to execute on their business plans for the life of our long-term leases. The pipeline today is in our normal $100 million to $125 million range with a couple of big deals out there that could push this number up.

As we said before, large portfolio transactions are low probability for us, but we continue to look for opportunities that can be accretive to our operator's field perspective by either adding buildings in a market or by entering a market with enough purchasing power to attract the right kind of staff to [affectionately] plan providing first-class resident care. We will continue to execute on our acquisition strategy of disciplined growth, just as we have over the past 8-years in building CareTrust.

And now I'll turn it to Bill to discuss the financials.

Thanks, Mark. As previously mentioned, good progress continues to be made on our dispositions. When they firm up and we begin announcing the multiple expected sales deals, which will make the forward-looking financial picture a little more clear, I would expect that we would resume publishing guidance. In the meantime, stay tuned for the upcoming disposition announcements.

Now on to the quarter and a little color on the numbers. For the quarter, normalized FFO slightly decreased 0.7% over the prior year quarter to $35.6 million. Normalized FAD slightly decreased by 1.7% to $37.5 million. On a per share basis, normalized FFO was flat over the prior year quarter at $0.37 per share and normalized FAD slightly decreased by 2.5% to $0.30 per share.

Rental income for the quarter was $46.8 million compared to $46 million in Q1. The increase of $800,000 is due to the following 3 items: 1, a $253,000 decrease in cash rents, which is made up of unpaid rent of $916,000, offset by an increase from new investments in CPI bumps of $663,000; 2, an increase in reimbursed property expenses of $77,000; and 3, a decrease in write-offs of $977,000, as we had none this quarter.

Interest expense was up $561,000 from Q1 due to a higher LIBOR rate, which accounted for most of the increase totaling $502,000 and higher borrowings under our revolver, which made up the remaining $59,000. G&A expense was down $237,000 from Q1 to the compensation-related items of $655,000, offset by other corporate-related items of $418,000. I'm expecting this year's G&A to be around $20 million.

Cash collections for the quarter came in at 93.9% of contractual rent and includes the application of $900,000 of security deposits. Without the application of the security deposits, cash collections was 92.1% of contractual cash rent. In July, we collected 102.1% of contractual cash rents due from our operators, but that percentage includes cash deposits. Excluding those cash deposits, contractual cash rents collected was 94.1%. We expect August collections to be similar to what July was with $0 coming from the application of security deposits.

Our liquidity remains extremely strong with approximately $16 million in cash and $385 million available under the revolver. Leverage also continued to be strong with net debt to normalized EBITDA ratio of 4.3x. Our net debt to enterprise value was 30.2% as of quarter end, and we achieved a fixed charge coverage ratio of 7.5x.

And with that, I'll turn it back to Dave.

Thank you, Bill. We hope this discussion has been helpful. Thank you for your interest and support. And with that, we'd be happy to take your questions.

(Operator Instructions) Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets.

So it sounded like in the release, you talked about running this parallel process and there's a chance that you could re-tenant maybe more of these assets than maybe it seemed like 30, 60 days ago. So I guess I'm just curious, first, am I reading that correctly? And then given your comments about still some strength in the transaction market, why not sell-in to that strength?

I'll start and maybe you guys can clean up for me. First, I'd say that this is pretty fluid, not just the buyer's ability but also operators' ability to step in. In some cases, where we are today with a particular operator that we might like -- would have liked to originally, maybe there's a lot stronger today than they were at the start of the year, and that option to retain assets and pull those into existing lease are pretty attractive. In some cases, and at it for that reason, another case is, we're looking at it because just in an abundance of caution, we want to have a solid plan B in case somebody on the buyer side a little soft with us.

And then how much of that Dave, is a reflection to of just -- you saw some improvement across the portfolio in fundamentals. Is that a factor? And how should we think about the time line or process that it would take to re-tenant and sort of get things underway and get the improvement versus being able to redeploy that into a more stabilized type deal, stabilized acquisition?

Yes. Interesting. The first part of your question, I'd say this have a part to -- as we do see some operators portfolio proving, that gives them sort of the mindset to shift from defense to offense, and there might be an opportunity to -- from a timing perspective, it's always going to be quicker, generally speaking, to re-tenant than to go through a sales process. So in any event, like James mentioned, we feel like even though things have gotten pushed a month or 2 because of how the world has changed, we're still confident that most of this work should be done by year-end.

Our next question comes from Steven Valiquette with Barclays.

I guess my question kind of builds a little bit on the first one. I guess, as you think through all the scenarios and the last comment you made about re-tenanting being quicker than asset sales and then having to redeploy that. I guess I'm just curious how you -- or how high you value the avoidance of dilution in all your decisions around this versus just doing what's right for the company longer term? The consensus right now still has numbers going up, I guess, pretty meaningfully versus -- in '23 versus '22. I know you're not giving any guidance today, but how should we just think about potential -- short-term dilution around this whole process versus what you thought 6-months ago? And just any updated thoughts around that at a high level would be great.

Yes. Thanks, Steve. I think our mindset has not changed. When we made the decision to run this asset management disposition, de-risking process back in February, we weren't just being reactionary to the couple of operators that couldn't pay. We also looked and tried to predict who else might have difficulty. And our preference -- and so that's kind of how we came up with the group of assets and operators that we did. Our preference, I would say, is still to go through with dispositions over re-tenanting in most cases. Because in our analysis, long term, we think that that's going to produce the most benefit for earnings. In other words, the analysis of what's the future rent from redeployed assets -- redeployed sales versus what's the earnings from re-tenanting at a lower rent, that's the crux of what we look at. And our bias is always going to be toward the long-term financial strength of the portfolio.

Our next question comes from Juan Sanabria with BMO.

Just curious on the transactions market, you kind of spoke to a change recently. So what do you think that actually means in terms of where cap rates could be and/or coverage levels could be, if you're able to kind of reengage in traditional [simple] acquisitions for either senior housing or skilled nursing? I'm not sure how the pipeline is skewed.

Yes. I think cap rates are probably not moving as quickly just because I think what we're seeing, as Dave mentioned, this phenomenon in recent weeks. Really what's taking place is, I think, call it, traditional buying market or big lending market, lenders are pulling back, maybe not going as high on the capital stack. And obviously, rates are right. And So I think just we're starting to see some inbound on opportunities where somebody maybe either call up about what's up or maybe they want to sell a couple of assets to us or even brokers calling us because they know we can write the check.

So I think it's too early to say exactly where cap rates are going. I think we're starting to see just a shift from kind of the auction process, multiple rounds with the best and final and numbers, call it, in Q1 that were kind of all-time highs to now more of a softer market where folks value our transactional acumen or user friendliness and our ability to write the check. So I think it's too early to say on exactly how fast cap rates and -- are rising while per bed pricing is dropping. We don't quite have -- it's still a moving target, but I think we'll know over the coming quarters.

Maybe just a point there, you said pricing per unit is dropping? I just wanted to clarify that.

Price per bed is -- in some markets, we're starting to see it's down pretty substantially.

Okay. And then just maybe a clarification on the point made on the prepared remarks. I'm not sure if I misunderstood. Did you say in August, there's no security deposits expected in terms of helping to pay cash rent? Is that because the security deposits have run out? Just some clarification there.

No. What I meant was we expect cash collections to come in at a percent, around 94% which does not include using any security deposits.

And then one quick one. I noticed Noble dropped off the top tenant list. Is there -- is that because they're part of what's anticipated that you said that the supplemental has changed? Or just curious on that driver.

Yes. So the change in the supplemental this quarter is previewing what we expect it to look like pro forma of the disposition and re-tenanting work to be complete.

Our next question comes from Dave Rodgers with Baird.

Dave, maybe you could talk a little bit about originating more loans versus acquisitions of your more traditional product. Obviously, that was skewed one way in the quarter and year-to-date. But how do you view that with this emerging acquisition pipeline? Are you still balanced between them? Or how are you leaning I guess, at this point in time?

Yes. I think we're always leaning into the traditional acquisitions. Those are our bread and butter. That's our mandate, that's our real long-term growth. This year, lending, the debt investments has been great and important avenue for us to put money to work in the absence of those traditional opportunities. And it's also provided us an opportunity to deepen our relationships with some operators that we've admired for a long time or that we already have in our portfolio.

So as we go forward, though, what we want to be conscientious of is really what surety schedule looks like. Because if you have $50 million coming due in 2027, then you got to [reverse] $50 million in 2027. And once you've done that, you haven't grown, you've kind of been on a treadmill. So we kind of view the debt strap for us is primarily important for relationship building. And they continue to be a story of operators that we like and want to support, and their ability to improve the sector.

As we move forward, though, we want to always prioritize long-term

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over debt. So we'll be [next] but we'll just keep in mind as we have other opportunities to put money to work. Right now, the term -- what we've done, we've got money coming in or money coming out for debt. We have terms at -- there’s 5 years and 10 years. And there's still -- as you look for opportunity to put money to work on that side that we'll, like I said, we're going to prioritize the better acquisitions.

Maybe just a quick follow-up on that. I think of late, you've talked about maybe just kind of branching into different product types that would still fit within, like behavioral health and other things. Is that part of this investment pipeline? Or is it really the core of what you've historically done that's emerging where that maybe becomes less relevant?

Yes. Currently, on the 125 -- I'm not sure that -- I don't think that there's any health in there today. But when we do quote it, now in the future, we will be -- those types of investments pipeline. We do expect to continue to pursue real health investment. And we would like to grow that [interim] I'd say we're kind of in the early [days] of putting that operate together and like in skilled nursing and seniors housing having a great bench of [offers] will be critical to be able to grow that [avenue] for us.

Our next question comes from Daniel Bernstein with Capital One.

I guess I have another follow-up on the pipeline as well. Just trying to understand maybe a little bit where the opportunities are coming from? Are they coming more from your existing operators? Or kind of what you alluded to with the tightening lending standards or lending market that you're having a bunch of new potential relationships coming your way?

Yes. I think it's brokers that we've worked with in the past or the other buyers that we've worked with in the past as well as operators that are bringing us [opportunities]. So it's not really one kind of subset of -- it's really kind of everybody. So that's the answer then, Dan. I think, in years, we've tried to be the best transactional partner we can. And in some instances, maybe there is a need for us just to ride shotgun on a transaction if the building or building in some instances, and pretty early and get to underwrite and have a little bit more time to kind of think about who to pair the buildings with the operators. And that's a little bit more of a prolonged process. So it's really kind of everything, everybody and anybody that we'd worked with in the past has -- not everybody, but we've received some inbounds from folks that we have relations -- existing relationships with.

And then I have a question on how you're thinking about potential wage growth within the seniors housing and SNF space. It seems like, looking at the chart report today, there was some pretty good hiring in health care, I don't know some of them has to do with wages and total comps for seniors and SNFs coming up to where broader health care space has been. And so do you think we should expect some moderation in wage growth in the seniors housing and SNF space?

You would think so. I think from the analysis of our portfolio, we saw wages peak, I think in March, February-March. And it's come down somewhat modestly since then anecdotally as we've talked with operators as recent as yesterday. What we're hearing is that applications for jobs are up, agency usage is trending downward. [Scott] who's an operator in the east coast the other day, who said that they are now hiring everybody at their facility -- seniors housing operator at the historical rates before the big spike. So while it's still elevated, I think it's -- we're starting to see some signs that wages are moderating again.

Our next question comes from Tayo Okusanya with Credit Suisse.

Yes. So a couple of quick ones for me. The first one is, well, we all realize that there's still a lot kind of going to transition right now. Again, some of your peers have gone through similar things. And I think some of them have kind of given us some sense of kind of net-net what the impact is or what the -- to their revenues from the expected combinations of sales and re-tenanting kind of new rents. I mean are you guys at the point where you can kind of provide some color in regards to that when this is all kind of said and done?

My sense is that we will have -- we'll be in a position to do that on our next call. But at this point, there's -- I think it's just a little bit premature. I think compared to our peers, it's probably fair to say that we started this process of asset management and restructuring work much later than they did. And so a little bit of a tough apples-to-apples comparison. But as soon as we can, which I think will be next quarter, we'll be able to give you a little bit more than we have so far.

And then stripping out the 27 assets and taking a look at the sub, you still have a handful of tenants where the rent coverage still kind of skates kind of at or below 1x. Some of the opening remark comments you made were helpful. But I guess at the end of the day, how do you look at those few tenants relative to your outlook both for skilled nursing and senior housing?

Yes. So as you look at the sub, you definitely see a handful of peers that don't have the coverage that we would like to see. I think one thing I would point out is the timeframe here is through March of this year, which really reflects some of the hardest-hit quarters and periods for our operators as it relates to COVID, and the labor market and all of that. So it is a pretty tough period to look at.

I think historically back at that period is maybe the toughest for our operators. If you look -- if you drill down at the individual operators in our top 10, what I can tell you is that based on our ongoing and regular conversations with them, and what I would characterize as a very healthy, positive and transparent relationship with each of those folks that are in our top 10. We really have concern of default in the short [term] there.

If you look down at the all other tenant list, you see -- looking at the EBITDAR coverage, excluding HHS funds, 0.99x for all other tenants. A little bit of color on that for you, Tayo, is, if you take out just 1 operator who actually has negative coverage, that 0.99x goes to 1.75x. And the total portfolio coverage goes from 2.02x in that column to 2.11x.

Now that other operator right, part of the 32 assets that we've talked about something with, although we talked with them about pursuing that early-on in the year, they are working through a turnaround plan and are current with rents and continue to show [performance]. So that's some color on our coverage slot.

Then one more if you could indulge me, please. So the color you guys gave about debt market is getting tougher, kind of give you some advantage on the acquisition side. I mean on the flip side, again, it also kind of takes a bunch of sellers out of the market, and you guys are trying to sell a sizable portfolio. So again, curious, again, if that's part of what's causing this dual track issue, number one. And then number two, how do potential sellers out there go about underwriting this pool of assets where the rent coverage is particularly low?

Tayo, it's Mark. What I would say is we have -- we have a concentration of assets in a particular state. So you have a couple of assets here, a couple of assets there. I think operators that are looking at these assets can tell a story to a lender, can point to existing communities maybe in a market or near a market that will give a new lender confidence to give them a brief -- and so a little bit better of a story from a [transition] perspective with a new operator coming in than an existing operator trying to sort of recap their own debt. So I think you're right that the market is moving but I think the advantage in some of these assets that maybe aren't performing where they can. But we are willing to take a chance and bridge an operator who's had a track record and has had some momentum in a particular market.

And I'm not showing any further questions at this time. I'd like to turn the call back to [management] for any closing remarks.

We really appreciate the support, the time, the interest. And if you have any follow-up, you know where to find us. Have a great week.

Ladies and gentlemen that [concludes] today's presentation. You may now disconnect, and have a wonderful day.