The impacts of inflation, rising interest rates, mounting indications of a recession and a tight labor market are presenting both challenges and opportunities as CareTrust REIT (NYSE: CTRE) continues to advance its plans to de-risk a portion of its portfolio.
“Since we announced plans in February to de-risk the portfolio, the world has changed quite a bit for us and for our operators,” CEO David Sedgwick said during the real estate investment trust’s (REIT) second quarter earnings call on Friday.
The current economic conditions have “softened” the motivation and ability of some buyers, particularly those dependent on lenders, but the company has ultimately adapted and plans to run parallel paths of selling and re-tenanting to ultimately end up with a substantially de-risked portfolio, he said.
CareTrust is on track to close on most of that portfolio work in Q4.
Sedgwick was also quick to point out that it’s not all headwinds facing CareTrust and skilled nursing operators. As rates continue to rise and lenders become more cautious, that may produce factors that ultimately favor growth for the REIT.
Pricing should moderate and sellers should prefer the certainty buyers like CareTrust present, he added.
REIT leadership was also “encouraged” to see the results of the final SNF rule issued by the Centers for Medicare & Medicaid Services (CMS) — particularly the phased-in PDPM recalibration and the “better than expected” final market basket adjustment.
CareTrust collected 93.9% of contractual rents in 2Q, and average quarterly occupancy for skilled nursing operators grew 1.4% over Q1.
The real estate investment trust’s (REIT) adjusted funds from operations (FFO) of $0.37 per common share beat consensus estimates by $0.01, and Omega shares were up 1.59% at the close of regular trading on Friday.
Fortifying the portfolio
CareTrust Executive Vice President James Callister described the acquisition disposition market for skilled nursing and seniors housing facilities as a “state of change” as lenders consider pulling back on lending as possible fears of a recession loom.
Despite the ever changing dynamics, CareTrust has made progress on pushing its plans to “fortify the portfolio.”
The REIT has entered into a purchase and sale agreement to sell a skilled nursing portfolio that has been brought to market, Callister said. CareTrust has also signed several letters of intent and are in the process of negotiations on several purchase and sale agreements.
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 REIT has also reached an agreement with Landmark Recovery to convert three of the 32 buildings into residential addiction recovery centers.
Stifel analysts said in a note published Aug. 4 that the portfolio repositioning will eliminate some tenants that have been of concern since before the pandemic.
“We expect the repositioning to create a stronger tenant base that can better weather future volatility in any operating environment,” Stifel analysts wrote.
CareTrust did not provide guidance for the full year, as it continues to make moves on its dispositions. CFO Bill Wagner said on the call that as things firm up and sales deals begin to be announced, “the forward looking financial picture [will be] a little more clear.”
‘Bread and butter acquisition opportunities’
CareTrust is starting to see an uptick in its “bread and butter acquisition opportunities” for skilled nursing facilities.
CIO Mark Lamb said they view this as a shift in the market to prioritizing the certainty of closing a deal — a position REITs have not been in for some time.
Despite these perceived changes in the market, Lamb said the REIT continues to be “very careful” when underwriting in today’s market.
Overall, Lamb said CareTrust continues to look for opportunities to either add buildings in a market or enter a market with enough purchasing power to attract the right kind of staff to provide quality care.
In Q2 CareTrust closed on a $75 million C piece five-year loan, which was secured by a large portfolio of skilled nursing facilities located in the mid-Atlantic, at a rate of 8.4%. The REIT also originated a $25 million mezzanine loan as part of the deal.
CareTrust worked with bridge-to-HUD lender White Oak to secure the deal, as part of its partnership to grow in the SNF space.
Lending continues to be, as Sedgwick put in a news release announcing the deal, “a relationship play” to grow existing partnerships and build new ones with top operators.
Earlier this month CareTrust also closed on a $22.3 million B-tranche term loan secured by five nursing homes in California.
The most recent fundings bring CareTrust’s 2022 year-to-date total up to $144 million at an average rate of approximately 9%, Lamb said.
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