CareTrust REIT, Inc. (CTRE) Earnings Call Transcript & Summary

Thank you for standing by. My name is Karen, and I will be your conference operator today. At this time, I would like to welcome everyone to the CareTrust REIT Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Lauren Beale, CareTrust's Chief Accounting Officer. The floor is yours.

Thank you, and welcome to CareTrust REIT's Fourth Quarter 2024 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 a 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 F-A-D or FAD. A reconciliation of these measures to the most comparable GAAP financial measures is available in our earnings press release and Q4 2024 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, and good morning, everyone, and thank you for joining us as we kick off what we hope to be another very strong year at CareTrust. It's worth stepping back to consider the broader macro environment. A couple of years ago when the Fed raised interest rates more aggressively than any time in our country's history, financial markets and the REIT sector, in particular, faced serious challenges. However, because we had driven down leverage and built up our dry powder, we were uniquely positioned to capitalize on a window of opportunity that opened and continues open to us today. The elevated rates drove many banks and investors to the sidelines and drove more and larger deal flow our way. We maximized the opportunity by recalibrating the team, deepening strategic relationships and working flat out, resulting in $1.5 billion of investments, essentially match funded with $1.5 billion of equity issuance from both the ATM and a follow-on offering. The full effect of last year's activities will result in meaningful FFO per share growth this year without any new investments. Today, we are one of the rare REITs that is largely indifferent to a higher-for-longer outlook. If rates come down, we will certainly benefit. But if they don't, our balance sheet, our portfolio, our access to capital, the opportunity set in front of us and our team are all in a stronger position today than we were going into 2024. Our mindset to maximize the window of opportunity open to us has not changed. Neither has our underwriting discipline that has made our portfolio so secure and resilient. We do not grow for the sake of growth. We remain laser-focused on long-term FFO per share growth. For us, that will always only be achieved by matching the right operators with the right opportunities and setting them up for success. In our view, the right operators are those who first take care of their employees so that their employees can in turn take care of their residents and patients and loved ones. With respect to those operators in our portfolio, we continue to enjoy exceptional lease coverages overall at 2.82x EBITDARM and 2.21x EBITDAR. Our top 10 tenants, which account for approximately 80% of triple net revenue are covering at 3.02x EBITDARM and 2.37x EBITDAR. Furthermore, looking at the many acquisitions made last year, the early performance is in line with expectations. The operating environment in general continues to stabilize with most parts of the portfolio at or ahead of prepandemic occupancy, skill mix and coverage. Of course, there's some noise and speculation a new administration means for skilled nursing. It's too early to be definitive but our conversation with policymakers, lobbyists, operators, all leads us to believe that the minimum staffing rule will be reversed and that Medicaid and Medicare continue to be unchanged as the cornerstones of health care in general and skilled nursing in particular. Our operators continue to post superior star ratings and quality measures compared to the industry at large and to their respective state averages as well. We count our truly blessed to be able to associate with some of the best operators in the country, and we can't thank them enough for all they do for their employees, patients and residents, not to mention the security and tailwinds they provide us and our investors. With this solid foundation, we are poised for another year of significant external growth if deal flow is even close to last year. On January 1, we effectively woke up to double-digit FFO per share growth on a run rate basis without accounting for any additional investments, but we are absolutely not resting on last year's records. We continue to execute our long-term strategy and zealously pursue investments that will expand and diversify the portfolio. James will provide color on the pipeline and a broader opportunity set in front of us. I'll just say this, I've never been more excited about our current trajectory and potential for growth. If you liked our story last year, I think you're going to love Chapter 2025. James?

Good morning, everyone. During 2024, CareTrust completed new investments totaling just over $1.5 billion at an estimated stabilized yield of 9.7%. These investments were reflective of a strong and consistent pipeline of activity throughout the year. The investments range in size from 1 facility to 46 facilities, from less than $5 million to over $450 million from real estate acquisitions to acquisition financing, mezz lending and preferred equity investments. We finished off the year with what is for us an unprecedented quarter of investment activity with every department in the company, putting an impressive effort to close approximately $700 million of new investments at an estimated stabilized yield of 9.9%. During the quarter, we added 81 triple net lease to the portfolio along with several new operators. Subsequent to the fourth quarter, we have closed on approximately $26.8 million of additional investments at a yield of 10.6%. These investments include the acquisition of the 28th and final facility related to the large Tennessee transaction previously announced in December at an initial contractual lease yield to CareTrust of approximately 9%. We also funded approximately $6.4 million under a mezzanine loan related to a small portfolio of skilled nursing facilities in Maryland at an initial yield of 13.2%. Our investment pipeline moving forward continues to be robust as we look to continue 2024's momentum into 2025. The reloaded pipeline today sits at approximately $325 million of real estate acquisitions and consists of some singles and doubles as well as some midsized portfolio transactions. Not included in our quarter pipeline are a couple of larger portfolio opportunities. The pipeline primarily consists of skilled nursing facilities but also includes some seniors housing. Please remember that when we quote our pipe, we only quote deals that we are actively pursuing under our current underwriting standards. And then only if we have a reasonable level of confidence that we can lock them up and close them within the next 12 months. We continue to look at a healthy flow of marketed opportunities as well as off-market deals brought to us by existing operators and other relationships, including relationships garnered through our decision over the past couple of years to lend with a purpose. Our primary focus has always been and will remain on sourcing and executing on accretive real estate acquisition opportunities. With that said, we expect to continue to receive inbound requests for loans and will selectively pursue lending opportunities that we feel will lead to attractive real estate acquisitions in the future with best-in-class operators. As we turn to 2025, a consistent flow of inbound opportunities, both marketed and off-market has us feeling highly optimistic that with our built-up team, our 2025 investment activity will continue to build on last year's results. The combination of our access to capital, a focus on accretive transactions with quality operators and the strong ongoing demand for post-acute and senior care provide an ample runway for pipelines of future growth during the coming year. With that, I'll turn it over to Bill.

Thanks, James. For the quarter, normalized FFO increased 68.1% over the prior year order to $72.9 million and normalized FAD increased 63.7% to $74.3 million. On a per share basis, normalized FFO increased $0.04 or 11.1% to $0.40 per share and normalized FAD also increased $0.04 to 10.8% to $0.41 per share. During the fourth quarter and in order to match fund our previously announced robust pipeline, we closed on an overnight offering, raising net proceeds of $487 million at $32 per share, which prefunded the November investment closings. As of today, we have $180 million of cash after funding those investments and after funding January and February investments and after receiving the tenant purchase option exercise that closed on February 1 of $44 million and also after making our dividend payment, which is now roughly $55 million per quarter. In yesterday's press release, we initiated guidance for the year with normalized FFO per share of $1.68 to $1.72 and for normalized FAD per share of $1.72 to $1.76. This guidance includes all investments made to date, a diluted weighted average share count of 187.5 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 $279 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 noncash revenue for GAAP purposes that is subtracted in the FAD reconciliation. Four, interest income of approximately $84 million. The $84 million is made $76 million from our loan portfolio and $8 million is from cash invested in money market funds. Five, interest expense of approximately $21.3 million. Interest expense also includes roughly $4 million of amortization of deferred financing fees; and six, G&A expense of approximately $30 million to $37 million and includes about $11.7 million of deferred stock comp. This guidance represents a range of FFO per share growth of 12% to 14.6% and on FAD per share of 11.8% to 14.4% without any additional investments. Our liquidity continues to remain strong. In addition to cash on hand, we have $1.2 billion available under our new revolver, which closed in December. Leverage continues at historic lows with a net debt-normalized EBITDA ratio of 0.5x. Our net debt to enterprise value was 3.5% as of quarter end and we achieved a fixed charge coverage ratio of 17x. Lastly, towards the end of Q4 and into Q1, we have seen the cost of our equity increase while the cost of our new revolver has decreased to where it may make sense to begin utilizing our new large credit facility and then decide how we want to term out those draws. We still love having all options on the table with respect to financing a robust pipeline. And with that, I'll turn it back to Dave.

Great. Well, we hope the report has been helpful and happy to take your questions now.

[Operator Instructions] Your first question comes from the line of Wes Golladay from Baird.

Looking at last year, PACs was a big driver of the investment activity, really strong year. When you look at the pipeline now going forward, do you see that to broaden out and more specifically, the portfolios that made the larger portfolios would those be with new operators?

Yes. I think this -- I think what you'll see this year is what you've seen from us in the past, which is expanding with existing operators and probably adding some new ones. With respect to large portfolios, those are kind of too early to really talk about at this point.

Your next question comes from the line of Farrell Granath from Bank of America.

I had another question about PACs going forward. I was wondering if you could make some commentary on your conviction as well as is there any bad debt associated within your guidance either to -- either offset if there were to be an outcome on their current situation?

No, there's no bad debt at all in our guidance, and we certainly don't expect any from PACs or any of our operators this year. And so with respect to PACs, it's too early to really make any comments before they are able to release their results. So we'll wait for that. And which just point you to the exceptional lease coverage that we have in place with them and hope to hear them soon.

Great. And just 1 more for me. Just in terms of your pipeline, where are you seeing cap rates shift? And are you seeing any compression going forward?

No, cap rates are really staying where they always have for skilled nursing in the 12.5 to 13.5, I would say somewhere in there and it remains consistent with yields and somewhere in the 9 to 10 range. On seniors housing, maybe a little bit of compression, but nothing that's all that notable at this time.

Next question comes from the line of John Kilichowski from Wells Fargo.

Maybe Bill, if we could start with your last comment that you made on the call before you turned it over to Q&A. You said your cost of debt is becoming a little bit more attractive here and that cost of equity has creeped up. Could you give us some tails on the actual numbers around the calculus that -- of what you're looking at here and maybe a more definitive answer, so we could understand in our models, how you're thinking about it?

Sure. Well, I'll begin with, we have a stated range of net debt to EBITDA of 4 to 5x. Obviously, if we draw the revolver, we have a long way to go to get to that range. I think depending upon our investment pipeline, the quoted pipe and then call it the funnel to the pipeline, it all depends on how that investments flow as to how we will either use our revolver or issue equity under our ATM. If we see a lot of deals at yields that, call it, what they were last year, I still think it makes sense to use to fund using equity. But again, it's a decision that is based on what we see beyond our quoted pipe.

Got it. And then maybe if I might jump over to Medicaid here. And Dave, you made this comment earlier where there's a great sense of confidence that the discussions around Medicaid there or Medicaid cuts and Medicare fraud investigations won't hit you all. So maybe more on the Medicaid side, what gives you the confidence to say that? And if there were to be cuts, where do you think they would be? And again, why do you think that they would not sort of touch the SNF space?

It's really just too early to be, like I said in my prepared remarks, very definitive on it. But if you -- if you read what House Speaker Johnson said just a couple of days ago, and you take them at his word, then and what President Trump has recently said about Medicaid, I think we would say we'd have more reason to believe that it will not be touched than it would be. Speaker Johnson, just Tuesday said Medicaid has never been on the chopping block and that they're just looking for fraud, waste and abuse, which, of course, we would applaud as well. They have -- there's bipartisan support for Medicaid as it is today and you have a Trump administration who in the first administration was incredibly supportive to the skilled nursing space. And we expect that same type of understanding of the importance of Medicaid and the bipartisan support for it to continue.

Your next question comes from the line of Austin Wurschmidt from KeyBanc Capital Markets.

Bill, just want to go back to your answer to the last question and also your comment in the prepared remarks about the source of funding kind of will depend on the pipeline in front of you. But the pipeline today at $325 million is, say, somewhat larger than maybe the average it was at various periods last year points in time and the team still seems very bullish on opportunities ahead, but mean should we take the comments about it may make sense to use the credit facility in the near term and term that out as any sense that there's an air pocket in deal activity immediately in front of you and then you'll take it in stride as the year progresses and you have a little better visibility?

Well, as it relates to the quoted pipe of $300-plus million, first, we'll use cash on hand. So that's going to take out a large portion of that. I don't think we see right now any air pockets in our investment pipeline. It continues as it did last year to replenish. So that gives us -- so that causes us pause each time we go to sign up a deal as to how we want to invest it -- how we want to fund it. Right now, we do like the price of our equity, and I would say we would continue to fund using equity but having that revolver come down in pricing relative to the cost of our equity causes us a little more pause unlike last year to possibly maybe use that to fund them.

That's helpful. And then maybe just for the team or whomever, does the fluctuation in your stock price -- I mean, you referenced you still like the cost of the equity. Does that change how aggressive you'd be on more of the, call them, value-add investment or where you were willing to maybe take a lower initial lease yield with potential upside in the coming years? Does that sort of change the sandbox, if you will, that you're playing in, on the types of deals that are attractive to you today?

No, it doesn't. I think we underwrite each deal on its own, and we get the right risk-adjusted returns that the deal presents to us.

Your next question comes from the line of Michael Carroll from RBC Capital Markets.

Just talking about, I guess, deal volume, I mean, how should we think about the cadence of the overall investment activity? It looks like the pipeline today is fairly similar to what it was at the end of 2024. Is that just due to like normal seasonal patterns of sellers trying to rush to sell before the end of the year? Or has there been a pause of activity due to the macro uncertainty? I mean, how should we think about that cadence over the last 2 months or so?

Yes, Mike, I'll take this. This is James. I mean I don't think there's been a pause in the cadence. I don't think that we see much of a change in deal flow. It still remains healthy. We still see deals coming in really weekly. So I think that, if anything, you see a rush in closings towards the end of the year as deals you've been working on during the year kind of start to have -- to come to a head and get done and tax planning, et cetera. But I don't think we've seen a meaningful shift in cadence of deal flow coming across our desk in the last 6 to 12 months, it's been healthy and consistent.

Okay. And then James, can you provide details on the recent acquisitions? I guess the ones that you're transitioning new operators and your banking and then stabilizing. And I mean, general over the past 18 months, have they performed in line with your expectations, so kind of marching back up to that mid-1.4, 1.5 type coverage ratio?

Yes. I mean, some of them is just too early, Mike, right? I mean, Tennessee in particular, it's just too early really to see that from when they got into now. We just don't have a full set of financials probably really would show that. But on the whole, I would say, yes. And I think that we don't have any reason to believe they're not on track to get where and when we've stabilized them going. And I would add that a key part of the equation and the risk-adjusted return as well is the credit and the lower coverage going in, the more credit we're going to insist on. And as of right now, we see those performing as projected.

Okay. And then when should we expect to see those coverage ratios start to kind of click into the stop? And I guess I'm specifically looking at Links. And I mean, great, if you could talk about it, but I know it's 1 specific or so you might not want to give us too many details but I mean, I think the first 4 buildings were required in what mid-2023, I mean, will that start to roll on to this up sometime in 2025?

Mike, probably not because Links in particular, you might recall, we gave them, I think, a 2-year ramp in their rent to get to stabilization. And so we -- that one in particular, had a longer lead time than others when we acquire new facilities going in new operators, we give them the time they need to wrap their arms around the buildings, get them seasoned and stabilized before we start putting that in this up.

Okay. So Links, you'll give it to us in year 3, so which would be 2026 to give us a number for that?

I would expect so, yes.

Your next question comes from the line of Juan Sanabria from BMO Capital Markets.

Just hoping you could talk a little bit more about the pipeline kind of mentioned seniors housing a couple of times. So just curious if there's any more appetite on the senior side if you're seeing more deal flow there. And would that include SHOP, which I know you've kind of talked about previously and just as the last little bit of that cap rate expectations for the seniors housing piece of the transaction pipeline.

Yes, I think we've been really interested in looking at seniors and from a SHOP perspective, call it, for the last couple of years. And I think that interest remains, and it's all going to just come down to finding the right entry point if we can find it. Historically, we've always done some seniors housing just about every year, which has kept the concentration kind of where it has been throughout our 10 years. We've done some triple net, as you know, recently. And -- but it remains to be seen. We really have to find that right entry point to go into the SHOP space.

Okay. Great. And then just going back to Medicaid and political uncertainty, one of the avenues being discussed is just pulling back on Medicaid expansion. How do you think that would play through and/or impact skilled nursing, if that were to come to fruition, just to play out that scenario whether or not it happens or not kind of notwithstanding?

Yes, I would not view -- if that's the direction that it goes, I would not view that as a serious concern for skilled nursing. I think the bulk of that expansion was for younger, able-bodied folks who were added to the Medicaid rolls and effect gets -- if they throw work requirements and different eligibility requirements, that I would not expect that to hit skilled nursing.

Your next question comes from the line of Rich Anderson from Wedbush.

So your comments around PACs. I appreciate that. You had a sort of a follow-on kind of completion in 2025 and 1 facility. But I'm just curious what it is to do work with them at this stage given the uncertainty around them. Would you be open to doing a deal with them today? Or are you sort of in a holding pattern as it relates to your external growth?

I think PACs and sales are probably in a bit of a holding pattern until they can release earnings. And I think we'll wait to see how that earnings release comes out and hope that it's a positive one.

Okay. Fair enough. And then on your SHOP comments, if so -- if you were to sort of get something moving in that direction, where do you see it executing? Would it be acquiring an enterprise that has the people and process in place? Or would you build it organically?

I think it's still to be determined. I think you could -- all options would -- I would say, are on the table with respect to SHOP. It's certainly a compelling area for the same reasons why skilled nursing is such a strong place to be. The demographics are just incredible. In the next 5 years from now, is projected that there will be more than 4 million more people aged 80 years or older. So that long anticipated silver tsunami appears to now be breaking. And so the demographics and the supply and demand, it's obviously a very compelling area that we're very familiar with on the skilled side, and a lot of that bleeds over to the SHOP side.

Okay. And then just one last one for me. In your $1.5 billion of investments last year, how much of that was sort of the normal course replenishment of your visible pipeline, which is today $325 and was there any amount in that $1.5 billion that would be "larger" portfolio that were in addition to what you characterize as your pipeline? I'm just curious to the makeup of the 2024 external growth platform and how that might be extrapolated into 2025 in terms of deal volume.

Yes. So the way we handle the pipe is we quote a number that we have a very high amount of confidence in. It certainly is not inclusive of everything that we are underwriting or reviewing or chasing even. The bigger the deal, the higher the threshold that we have on it before we included in the number. So as the year went on, we were certainly working on, for example, the Tennessee deal, right. Throughout the year, but we were not including that until we really had to because it was that certain that we were going to get it done. And so we announced what we feel very confident in, we execute and we replenish that pipe as -- we stayed a replenished order pipeline as deals either closed, fall out or get replenished.

So of the $1.5 billion last year, is it fair to say that 50% of it was this sort of replenishment movement and 50% was stuff that wasn't in that pipeline, but ultimately worked out, like in the case of Tennessee? Is that a reasonable breakout of what happened last year?

No, I don't think so. I think if you roll back the tape, you'll see -- you'd have to go back to each time that we updated our pipe number and compare that with what closed. And then I would say probably that the Pennsylvania -- I'm sorry, the Tennessee deal was the one that would not have been included in sort of run rate quoted pipe because we really did wait until that thing was signed up and it was a material investment, which required us to disclose it. So I think the -- if you factor -- if you take that one out, maybe from the quoted pipe numbers along the way, I might give you a better read.

[Operator Instructions] Your next question was from the line of Omotayo Okusanya from Deutsche Bank.

Yes. Good afternoon, everyone. Just curious on the Medicaid side, from the state perspective as they start the year off for their yearly budget, are you kind of seeing any early indications of what might be happening in terms of just Medicaid reimbursement at the state level in the key states you have exposure to?

We don't expect any negative surprises on that front based on what we've heard from our operators. There's some -- just to give you one little piece of color. There is some building optimism that Texas will see a fair size increase which would obviously be very welcome news to that state that has historically been underfunded. But we've also been disappointed by that type of hope in Texas before, too. So besides that, I think we're expecting it to be a pretty routine season with respect to Medicaid rate.

And then, I guess, sticking to the Medicaid conversation, I appreciate all the color you've put on how the government are thinking about it. But I do think one other popular theme is this idea of the government has kind of pulls back on the amount of kind of Medicaid maxing they're doing and they ask the states to be much more responsible for it. Any thoughts around that line of thinking about how -- but you could see potential evolution of Medicaid. And on the Medicare side, also a lot of thoughts around they start to push much more Medicare Advantage versus traditional Medicare and I think, again, with Medicare Advantage, the reimbursement rate tends to be lower to the operator. So again, just any thoughts on those kind of 2 thoughts around how the Trump administration may attack this.

Sure. I'll go in reverse order. I think the trend is certainly not the industry's friend with respect to managed Medicare. That trend has been in place for -- gosh, I've been in the business 25 years, and it's been part of the discussion this whole time. And that's going to -- I don't expect that to reverse. I think that trend will continue. And Medicare Advantage will continue to eat into regular fee-for-service Medicare. And so then that -- what I'm about -- historically and going forward is the same is true that the more sophisticated operators are able to adjust to that. They're able to invest in those relationships with the managed care organizations and gain share from that. So yes, it's challenging and there's a lower length of stay, but you can actually capture some share. And if you're really sophisticated, you can net-net, not do too poorly from that. With respect to the [ SMAB ] I guess, just spit balling, you've got a house that does not have nearly the majority that it had during Trump 1.0. And in the first administration, President Trump ran on building the wall and repealing Obamacare, health care reform. And they were unable to pass any of these types of approaches to chip away the Medicaid rates. And now you have a fairly razor thin majority. And so as they -- as they look at that, I think you're going to have the same type of opposition with much less room for error by -- in the house and -- but also those Republican governors are not interested in having -- taking on more of that burden. There's just no room really to cut for Medicaid for skilled nursing. And I think the states and the federal government are more aware of that today than they ever have been based on what happened with the pandemic.

That's helpful. And if I may indulge with one more Just around PACs, again, I know it's a bit of a black box today. But how do you guys kind of think about a worst-case scenario as it pertains to kind of the current federal investigation? Just again, as you guys are kind of handicapping this thing, like worst-case scenario is what in your mind?

No, we don't really want to speculate on that in this forum. We don't have a worst-case scenario that we're concerned about right now. We think that they're going to be just fine, and we really don't have much more to comment before they, themselves are able to comment.

If there are no more questions, I will wrap up the Q&A session. I will now turn the call over to Dave Sedgwick, Chief Executive Officer, for closing remarks.

Well, thank you, guys, very much for your interest and support. Look forward to another very strong year here at CareTrust. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.