CareTrust REIT (Nasdaq: CTRE) is moving forward with plans to de-risk a portion of its portfolio, with 27 of the 32 targeted assets up for sale.
The 32 facilities – a “vast majority” of which are seniors housing and some skilled nursing – represent approximately 10% of the real estate investment trust’s contractual cash rent.
The lingering effects of COVID caused these facilities to “hit the wall” and keeping things as usual was not sustainable for the long-term, CareTrust’s President and CEO David Sedgwick said during the company’s first quarter earnings call on Friday.
Despite the upcoming portfolio changes, Sedgwick said the REIT did not expect any new operators to be under consideration for sale or restructuring for the foreseeable future.
“We’ve tried to be proactive and forward looking in coming up with this list,” he said.
Sedgwick was quick to point out that this didn’t mean the REITs remaining portfolio was “completely out of the woods yet.”
Rental income for the quarter was $46 million compared to $49.1 million in Q4 2021. The decrease of $3.1 million was attributed in part to a $1.7 million decrease in cash rents, which was made up of $2.2 million of unpaid rents, offset by a $500,000 increase in rent from Consumer Price Index bumps and new investments.
Still, things appear to be looking up for CareTrust’s overall portfolio. Appoximately 95% of rent was collected in the quarter, and in April, the company collectd 93% of contracted rent.
“So far May collections appear to be in line with April,” Sedgwick added.
Skilled nursing occupancy held stable for CareTrust from the Q4 2021 to Q1 2022 – currently at 71.4% – compared to pre-pandemic occupancy of 78% and the low in January 2021 of 67%.
“The tight labor market continues to put pressure on occupancy recovery and margins, though our operators currently report the worst appears to be behind them,” Sedgwick said.
CareTrust CIO Mark Lamb suspects that industry headwinds — such as CMS’s recent announcement of the modest increase in Medicare funding, ongoing labor issues that continue to plague the industry, and the eventual end of the public health emergency – will force more undercapitalized operators to put their properties to market.
Skilled nursing makes up roughly 80% to 85% of CareTrust’s portfolio, he said.
Overall, the REIT’s quarterly results were in line with analyst expectations, according to a note published Thursday by BMO Capital Markets. Analysts said CareTrust’s repositioning strategy “is prudent in the face of likely continued operating pressures.”
Stifel analysts also noted in their own note on Thursday that CareTrust’s portfolio plans made sense given the market..
“We continue to believe this approach makes sense given the REIT can easily sell non-core properties into a very liquid sales market and recycle the capital,” Stifel analysts wrote.
Growing where it makes sense in an inflated market
While CareTrust will be partnering with one of the leading bridge-to-HUD lenders in the skilled nursing space to grow existing partnerships and build new relationships with “best in class” operators, the REIT may take it slow to start.
“Lending has really always been a relationship play for us,” Sedgwick said.
The company does not plan to “significantly” increase its exposure on the bridge-to-HUD program, and will deploy capital where it makes sense, according to CareTrust CIO Mark Lamb.
“We’ll do our best to match funds coming in with funds going out,” Lamb said. “We’ve seen a lot of deals with operators that we know very well and I would say we’re using [the platform] to either expand with existing tenants that we currently have or for relationships we’d like to develop on the sale-leaseback side at some point in the future.”
CareTrust continues to take advantage of opportunities to build new relationships in the space and put money to work at a historic range of yields, he added.
CareTrust acquired two assets for $22 million in the quarter, including a 155-bed SNF in Ennis, Texas for $8.9 million, or $66,000 per bed, as well as a senior care campus in Decatur, Ill. that included 95 SNF beds.
Eduro Healthcare took over operations of the Texas SNF on Feb. 1.
“We continue to be cautiously optimistic that we will source more bread and butter one offs, like you saw from us in Q1 over the coming quarters,” Lamb said, however, he admitted that pricing in general continues to be “excessively high.”
In some of the smaller and secondary markets, CareTrust operators are expecting pricing to “come back down” and Lamb is already starting to see evidence of it.
CareTrust has also “beefed up” its investment team, made up of several former nursing home operators, which Lamb believes will enhance the company’s ability to connect with industry leaders and expand its pipeline.
CareTrust’s pipeline is currently in the $150 to $175 million range.
Investing in behavioral health
Behavioral health has become another health care space real estate investment trusts have taken steps to get into and CareTrust is no exception.
CareTrust announced that it had signed leases with Landmark Recovery to repurpose three of its five facilities left in the 32 targeted for sale into addiction recovery centers.
Sedgwick said he is eager to see how behavioral health will grow as a potential investment area for the company moving forward.
“The behavioral health asset class not only provided us with a new tool for finding a higher and better use for our own underperforming assets, but it also opens up a high demand undersupplied investment opportunity for growth,” he said.
Sedgwick said since their Q4 2021 call when CareTrust officially announced its interest in entering the behavioral health space the REIT has heard from both brokers and operators that may provide future new investment opportunities.
Sedgwick compared the behavioral health space now to where SNF space was several decades ago.
“In some ways it feels like the SNF business did 30-40 years ago, from a fragmentation, professional management and regulatory [standpoint],” he said.
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