CareTrust REIT Inc (CTRE) 2025 Q1 法說會逐字稿

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the CareTrust REIT first quarter earnings call.

(Operator Instructions) Thank you. I would now like to turn the call over to Lauren Beale, Chief Accounting Officer. Please go ahead

Thank you, and welcome to CareTrust REIT's first quarter 2025 earnings call. We will make forward-looking statements today based on management's current expectations, including statements regarding future financial performance, dividends, acquisitions, investments, financing plans, business strategies, and growth prospects.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to materially differ from our expectations. These risks are discussed in CareTrust REIT's most recent Form 10-K and 10-Q filings with the SEC. We do not undertake the duty to update or revise these statements, except as required by law.

During the call, the company will reference non-GAAP metrics such as EBITDA, FFO, and FAD. A reconciliation of these measures to the most comparable GAAP financial measures is available in our earnings press release and Q1 2025 non-GAAP reconciliations that are available 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; and James Callister, Chief Investment Officer

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

Thank you, Lauren. Good morning, everyone, and thank you for joining us. Let me begin with our pending strategic acquisition of the London Stock Exchange-listed company Care REIT. On March 11, we announced that our offer was unanimously accepted and recommended by Care REIT's Board.

The voting deadline was last Friday, April 25, and I'm thrilled to announce that their shareholders have approved the deal. We expect to officially close on the acquisition next Friday, May 9. Based on Wednesday's sterling dollar exchange rate and excluding transaction costs, at 108pR per share, the deal has a purchase price of approximately $856 million, and the portfolio, as of the end of last year, has contractual rent of approximately $68.6 million.

The acquisition of Care REIT marks our first M&A activity, our entry into the UK, and the largest deal in our history. So some context. Last year was truly an extraordinary year for CareTrust. At the beginning of 2024, we thought that we had a chance to possibly double the highest single-year record of investments in our history, but about midway through the year, 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. The flywheel and the entire team ran hot and fast, so much so that we really wrestled with the following question. If it ain't broke, why fix it? Why look at shop? Why look at the UK? These are all really fair questions that we took seriously. So why the UK's strategic acquisition of Care REIT, and why now? Let me tell you why.

First, this deal diversifies our business in terms of operator concentration, geography, payer sources, and asset classes, bringing our US skilled nursing concentration down to approximately 49% by property count and 63% by rental income.

Second, in addition to adding Care REIT's 134 properties across 15 operators, generating $68.6 million of new annual rent, that is covered by more than 2 times on an EBITDARM basis, the deal also adds to us an experienced UK based investment, asset management, and accounting team who are hungry to grow again. Third, the purchase price represents a significant discount to replacement cost and will be accretive in year one.

Finally, and essentially, the deal adds a new growth engine for CareTrust for years to come. So when you look at that rationale, along with our cost of capital, our balance sheet, the strong demographics and supply-demand tailwinds behind our sectors here in the US and in the UK, and you combine all of that with a CareTrust team and culture that continues to get stronger every year, we began to reframe the question of if it ain't broke.

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 UK will be additive to our current robust US growth engine.

James will share with you now color on the deals closed in Q1 and the reloaded pipeline of US deals, along with some insights into our outlook for UK growth.

James?

Thanks, Dave. Good morning, everyone. During the first quarter, we completed three new investments totaling over $47 million at a yield of approximately 10%. These investments included a skilled nursing facility, a senior's housing facility, and a mezzanine loan related to the acquisition of a skilled nursing portfolio.

On April 1, we also closed on the acquisition of a skilled nursing and assisted living campus in Southern California. The acquisition was completed through a joint venture arrangement pursuant to which the company provided a combined common and preferred equity investment totaling approximately $34 million at an initial contractual yield of approximately 9.7%.

The joint venture has leased the facility to affiliates of The Ensign Group pursuant to a new 15-year triple net lease that includes two five-year extension options and annual CPI-based escalators. This transaction brings our year-to-date investment total to approximately $82 million at a yield of approximately 10%.

As we look forward, our investment pipeline remains strong. The reloaded pipe today sits at approximately $500 million and consists predominantly of real estate acquisitions. The quoted pipeline includes some singles and doubles, as well as some mid-to-large sized portfolio transactions. Our quoted pipeline does not include the recently announced UK acquisition of Care REIT, nor does it include a couple of larger portfolio opportunities that we continue to review.

The pipeline primarily consists of skilled nursing facilities, but also includes some senior housing opportunities. And please remember that when we quote our pipe, we only quote deals that we have a reasonable level of confidence that we can lock them up and close within the next 12 months. We also continue to look at a healthy flow of inbound marketed opportunities, as well as off-market opportunities brought to us by existing operators and other relationships.

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.

Turning to our pending acquisition of Care REIT. We are very excited about the immediate and long-term benefits of these assets and about utilizing the talented, seasoned team there, as well as our own experience and relationships to expand the UK portfolio this year and beyond. We are actively reviewing acquisition opportunities in the UK and continue to meet with existing and new operators eager for a capital partner like CareTrust to take advantage of a compelling operating environment.

We feel that UK care home investment opportunities provide an additional pipeline of accretive acquisitions where we are uniquely positioned to win deals. With our competitive advantages of deep underwriting and operating experience, pristine balance sheet, access to and cost of capital, and certainty of closing.

And while we are keen to find and close on UK acquisitions, and as evidenced by our reloaded investment pipe, we are careful to not let those efforts slow the pace of our primary focus of sourcing and executing on accretive real estate acquisition opportunities here in the US.

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

Thanks, James. For the quarter, normalized FFO increased 67.4% over the prior year quarter to $77.8 million, and normalized FAD increased by 66% to $80.8 million. On a per share basis, normalized FFO increased $0.07 or 20% to $0.42 per share, and normalized FAD increased $0.06 or 16.2% to $0.43 per share.

During the first quarter and in conjunction with the UK transaction, we were required to put cash into escrow in order to evidence sufficient funds to cover our acquisition of Care REIT shares in anticipation of shareholder approval of the transaction. The deposit of cash into escrow was made primarily through a draw on our revolver.

In addition to acquiring Care REIT issued shares using the cash held in escrow, we intend to assume Care REIT's existing debt, which was approximately $259 million as of year end. We expect to refinance that debt subsequent to the transaction closing with a portion of the proceeds from a $500 million five-year term loan from our bank group that we expect to close this month subject to ordinary closing conditions. The excess cash from the term loan would also help fund our $500 million pipeline.

In yesterday's press release, we raised guidance for this year with normalized FFO per share of $1.69 to $1.73, and for normalized FAD per share of $1.73 to $1.77. This guidance includes all investments closed to date, a diluted weighted average share count of 190.6 million shares, and also relies on the following assumptions.

One, no additional investments nor any further debt or equity issuances this year. Two, CPI rent escalations of 2.5%. Our total cash rental revenues for the year are projected to be approximately $284 million, not included in this number is the amortization of lease intangibles that will total about $3.5 million, but this will be in the rental revenue number as required by GAAP.

Three, interest income from financing receivables of $11.5 million. Included in this number is $9 million of cash and $2.5 million of non-cash revenue for GAAP purposes that is subtracted in the FAD reconciliation.

Four, interest income of approximately $90 million. The $90 million is made up of $76 million from our loan portfolio and $14 million from cash invested in money market funds. The $6 million increase from last quarter in interest income is from the cash held in the escrow account for funds needed to close the UK transaction.

Five, interest expense of approximately $24.3 million, up from $21.3 million last quarter's guidance due to the line draw for the escrow account related to the UK transaction. Interest expense also includes roughly $4 million of amortization of deferred financing fees.

And six, G&A expense of approximately $33 million to $37 million and includes about $11.7 million of deferred stock costs. We plan on updating this guidance again once the UK transaction closes.

Lastly, our liquidity continues to remain strong. Subsequent quarter end, we raised roughly $100 million via the ATM and used $50 million of that to pay down the revolver to $375 million. In addition to $45 million of cash on hand, we have $825 million available under our revolver and we are extremely thankful for our tremendous bank group in backing us on a $500 million term loan that we have commitments for and expect to close this month.

Leverage continues at a historic lows with net debt to normalized EBITDA ratio of 0.5 times. Our net debt to enterprise value was 2.9% as of quarter end and we achieved a fixed charge covered ratio of 15.2 times. After the UK transaction closes, we expect our net debt to normalized EBITDA ratio to be below 2.5 times, which is still well below our target range of 4 times to 5 times.

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

Thank you both. We hope that our report has been helpful and thank you for your interest and support. We're happy to take any questions you might have.

(Operator Instructions) [Carol] Granis, Bank of America.

Hi. Good afternoon. This is Farrell Granath. My first one is, can you please make some comments on possible expectations with the general macro -- specifically with policy and provider taxes and the impacts of that could flow through to your portfolio?

Hey, Farrell. Yeah, there's really no real change in our outlook from our last call on potential Medicaid cuts. I think along with everyone else, we're just monitoring the process. And it's unfortunately too soon to be definitive on this one way or the other. So there continues to be widespread bipartisan support for Medicaid and protecting the care for seniors in nursing homes, especially. So we will monitor the progress in that budget process along with everyone else.

Thank you. And also, I was curious if you could draw a framework of what are the conditions for you to enter into a debt investment rather than portfolio or property acquisitions.

Yeah. Our default is, of course, always to prioritize acquisitions -- what we've been -- the way we've talked about debt investments over the last really couple of years is a means to an end. If we see that there's an opportunity through a loan to build a relationship, that's strategic in nature because this borrower or operator is a key relationship that we think can lead to real growth in the future, real acquisitions in the future, then and really only then would we entertain a loan?

So the loan book has increased quite a bit over the last couple of years. But the $1.5 billion of investments that we did last year, about half of those were tied to those strategic relationships that we made through lending in previous periods.

And if you look at the $500 million of acquisitions that is largely acquisitions in our pipeline today. The vast majority of that are off-market deals that have come from those relationships that we've created from those loans.

Austin Wurschmidt, KeyBanc Capital Markets Inc.

Great, and I hope everybody's doing well out there. My first question, just on the Care REIT transaction. Just wanted to pinpoint. I mean any changes to the annualized earnings or FAD accretion from the initial underwriting or neutral disclosure just from either escalators that have kicked in additional synergies or just how you plan to finance the transaction?

Yeah. We will -- I know that's that's the pressing question on everybody's mind, and we will provide answers to those questions in a little bit over a week when we announced the deal. Until then, we're still fairly limited to what we can say.

That's fair. I understand. I thought that may be the case. Maybe James or Dave, could you just size up what a reasonable volume or investment pipeline we should think about for the UK market focused more on the normal course singles and doubles? And then also speak to the yields that you're seeing in that market overall.

Yeah, I'll start, and James can add some color, if mine was too dull. The pipeline there is going to take some time to catch up, right, to mature to the point like we have it here in the States. So there are a number of, call it, singles and doubles that we're currently looking at. The range of cap rates, I think, is maybe going to be a little bit wider in the UK than you used to seeing us here in the States simply because, as you know, skilled nursing in the States, those cap rates stay fairly fixed and tight regardless of the cycle that we're in.

But in the UK, these -- the care homes are more like a hybrid assisted living memory care with some nursing home capabilities into it. And so there's a wider range of quality and therefore, cap rates too. So you might see something in the high 7s, 8s, and 9s depending on the particulars of the deal.

That's helpful.

I just think I'd add, Austin, that look, I don't think we have a goal, just like we don't here. We approach it the same, which is we want to find the right deals and not set a goal of the number we want. But when the right deal is there, we'll try to get plucky and go get it.

That's helpful. And if I can squeeze in just one more, pivoting a little bit here. But I know we're able to look at the coverage ratios that you provide in the supplemental and looking at kind of packed things, trending very well.

But just speaking more broadly across the real estate as well as the other loan investments, curious for an update of how these properties are performing over the last six to nine months relative to what you initially underwrote. And just wondering how you're thinking or planning for any and all outcomes as you await for them to file their financials hopefully here sometime soon. Thanks.

Yeah, thanks, Austin. With respect to PAC, I think you were just asking specifically about them. We really don't have any comment or update besides just having the data and the coverage speak for itself at this point. Still waiting for their release and disclosures.

Good. Thanks for taking the questions.

Rich Anderson, Wedbush Securities.

Thanks and good morning. So you answered the question why UK you asked yourself last year. Does -- why not shop now take a bit more front and center with you going forward? Or do you feel like you're sticking to your triple net knitting for the time being and let the UK process sort of get folded into the business and so on? Plenty to do there.

Well, that's a great question. I think we certainly feel like there's plenty to do in the UK. I think the benefit that we have with this particular deal is we're not having to figure things out on our own and start from here. But we have the team based in the UK that we can just kind of facilitate and able and power to get back to the growth story.

And with respect to shop, I think the same kind of process and rationale applies. We've been looking at shop, like we've said, for the last couple of years. And I think we're just looking for the right entry point there, like we've been looking for the right entry point into the UK. And we'll be patient and wait for the right deal.

Okay. In terms of the pipeline, the $500 million, is that just US or does that include UK as well? I'm sorry if I missed that.

Yeah, that's just US.

Okay. And so when you think about returns, are they fairly on top of one another, what you see in the US and what you're seeing in the UK in terms of cap rates and IRRs and all that?

Well, in the US, I think James could correct me, but I believe that most of what's in that $500 million is skilled nursing. So you're going to see a higher yield than I think, what we might be looking at in the UK, but it's still too early. We might see some deals in the UK in the 9s. I might also see some in the 8s.

So I think they're all going to be accretive and fairly close to each other, but different assets and each deal will, as you know, got to underwrite individually.

Great. Last for me. You guys were good enough to sort of dig into the whole CMS reimbursement for fiscal year 2026. I know the headline is 2.8%. Can you talk about the moving parts there and what the real number is for the way you see it today for your portfolio and whether or not you're kind of happy with what they're assuming for next year or suggesting for next year? Where do you stand on that? We've talked a lot about Medicaid, but where are you on Medicare? Thanks.

Sure. Thanks, Rich. Yeah, I think Medicare's -- I think the rate increase is fine for us. There's the headline rate, but then the devil's in the details. Every facility is going to have its own unique increase based on different variables that go into that.

So I think for us, as you look at it across the board, it blends to about a 2.2% across our portfolio, which, you know, 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 there.

Okay. Fair enough. Thanks very much.

Wes Golladay, Baird.

Hey, guys. By doing a large deal in the UK, did that put you on the map? Are you seeing a lot of new relationships? And then will you also start lending in the UK?

Yeah, Wes. I'd say we put out a press release a couple of weeks ago just when we announced that our offer was best and final. And what I said there is what I'll say right now, which is regardless of the outcome of the vote, we feel like we had already won because of the response from operators there and brokers. It was really overwhelming.

We went out there a couple weeks ago and met with several operators, and they really are hungry to grow with us. So we think that there's going to be a great opportunity. We are not looking to lend into that market today. We're just looking to do your traditional acquisitions and leases.

Thank you.

Michael Carroll, RBC Capital Markets.

Yeah, thanks. I just want to clarify on, I guess, the near-term opportunity in the UK. I know the pipeline doesn't have any UK deals. I believe, James, you kind of highlighted that it might take some time, or maybe Dave, I forget who it was, that it might take time to kind of build up that pipeline.

But obviously, David, you just announced in that press release you referenced that you're getting some reverse inquiry. So I mean, how long does it take to start to build that pipeline over there? Can more deals happen in the back half of this year, or does it take longer to build that out?

I would hope that we could -- my hope is that we could get something done this year. But like I said, it's going to take some time because we're -- the team there, while they've been there a long time, they haven't really had access to capital. And so, the existing pipeline that we're stepping into was fairly thin.

And -- but, not to put too much pressure on James. If he doesn't get something done this year, he might be -- I'm just kidding. We'll try to get something done this year. But I think next year, it would be more likely that we start to see a more mature pipeline form.

Okay, great. And then, James, can you talk a little bit about the US SNF market? And has this market changed at all over the past six months or post the PACs deal? I mean, is there less capital looking for deals, or is that capital more on the sidelines just kind of waiting to see kind of what happens with the Medicaid outlook? I mean, has the competitive landscape changed at all?

I don't think it has really at all, Mike. I think there's still the same groups, same amount of capital out there looking at deals. I think there's just about the same deal flow out there. I think you still -- if anything, you know, some of the noise has maybe some regionals or mom-and-pops feeling like it's a good time to sell.

So I think it's pretty unchanged. Same pretty fierce competitive landscape. Same, pretty consistent buyer pool. And kind of same groups typically at the same deal table.

Okay. And then, just last one, I guess, for Bill, related to guidance. I know you said that the Care REIT is not included in that. And I believe you mentioned this when you did your walkthrough. But I know that you have about $600 million of cash on the balance sheet. I mean, did I hear that correctly? Just assume that is invested in, like, money market type funds within guidance?

That restricted cash is invested in some money market accounts with the escrow agent.

And that's what you assumed that's in your updated guidance range?

Yeah, that is included in the -- that represents an increase over last quarter's guidance for interest income.

Okay. Great. Thank you.

Juan Sanabria, BMO Capital Markets.

Hi. Just curious on the watch list and kind of cash paying tenants, how things are trending in your comfort level that there won't be any surprises as we look out for the next few quarters?

Well, by definition, if we knew of a surprise, it wouldn't be one. But having said that, we feel pretty good about the strength of the overall portfolio, as you saw, on the overall coverage tick up. Already it was a ridiculously high coverage to begin with, and it picked up further last quarter.

I think we have a pretty good handle on the folks that are not paying and we're trying to deal with those by selling or transitioning those assets. So I would be surprised if we had a surprise.

Fair enough. And then just maybe looking at the top 10 tenant lists, you've got Links and Champion Care that have transitioned assets, but how are you feeling about their trajectory and just the pace of how they're executing on the business plans?

Yeah, that's a great question. Feeling really good about both. Both on track or a little bit ahead of schedule. With Links, they've been in there the longest, but they also have the longest ramp of rent bumps based on their initial large deal that we did with them. So we want to just make sure that that next rent bump is fair to them before we put them in in front of everybody.

Great. And then if I could be greedy, one more question for Bill. Is the term loan you guys are talking about with the banks, I'm assuming that that'd be multi-currency, is that correct? And do you have a sense of kind of what the cost may be and differential between the US and pound interest rates?

Yeah, it won't be in pounds. It's going to be an amendment to our existing credit facility. So the credit facility will go from 1.2 to 1.7, $500 million of that will be a term loan, and the pricing on the term loan will be just inside our revolver.

Thank you.

(Operator Instructions) Omotayo Okasanya, Deutsche Bank.

Yes. Good afternoon. So again, rent coverage ratio is going up. It sounds like generally the health of the operators is good. Just kind of curious the operators' kind of access to financing at this point. You did have one of your peers this morning talk about one of their tenants having some challenges with their ABL.

Curious, are you seeing any of that industry-wise at this point? And also, if there are any challenges for operators also, or even for you as a person to kind of GSE financing?

No, we're not seeing anything like that.

All right. Good to know. Thank you.

Thanks, Tayo.

I will now turn the call back to Dave Sedgwick for a closing remark.

Well, again, thank you very much. We're, as you can tell, very excited about the quick and robust start to the year, and really appreciate everybody's support. Have a great weekend.

Ladies and gentlemen, that concludes today's call. You can now disconnect. Thank you, and have a great day.