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

Hello, everyone. Thank you for joining us, and welcome to the CareTrust Second Quarter Earnings Call. [Operator Instructions] I will now hand the conference over to Lauren Beale, Chief Accounting Officer. Lauren, please go ahead.

Thank you, and welcome to CareTrust REIT's Second Quarter 2026 Earnings Call. Today, we will make forward-looking statements 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-Q filing 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 FAD, A reconciliation of these measures to the most comparable GAAP financial measures is available in our earnings press release and Q2 2026 financial supplement, which 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; Derek Bunker, 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, and good morning, everybody. Thank you for joining us. The CareTrust flywheel cranked up a few years ago, when we hit around 7x our lifetime annual average of investments in 2024 and again in 2025. The team shows no signs of slowing. In fact, the opposite is true. After 2 back-to-back record setting years, we are again on pace to deliver in a big way for our operators and shareholders. Last quarter was the single largest investment quarter in our company's history, excluding M&A activity, with approximately $900 million of investments at a blended yield of 8.9%. James, Kyle, Joe, Tree, Josh, JP, Nick, Martin and Killian, that's the dream team right there responsible for a year's worth of investments in 1 quarter. I'm so proud of them and proud of the entire CareTrust team across the board, accounting, asset management, finance, tax, legal, data, operations. Everyone is rolling hard together to make this year a 3p of record performance. Q2 results achieved record investment quarter, record revenues, record FFO per share and a healthy raise to guidance. We built on a foundation of record operates coverage and operator quality care measures. Let me expand on that foundation just a little bit. We are stoke to see our operator quality care measures exceed the industry averages for overall star ratings, health inspections, quality measures, successful discharges and readmission rates. Let me repeat that. Our operators outperform industry averages for overall star ratings health inspections, quality measures, successful discharges and readmission rates after they've had a chance to manage these buildings for at least 4 years. In my 2025 annual report letter, I discussed how mission-critical it is for us to lease our properties to high-quality operators and how we view the relationship between them and the value of our real estate investments. A quality operator is one who is driven by a mission focuses their REIT's first on becoming the employer of choice and through that, become the quality care provider of choice in their market. Only after achieving sustained quality care outcomes, can a provider and the real estate they operate, achieve sustainable financial stability. We have seen this formula for success prove out over the last 25 years. A care trust operator is one who harmonizes mission-driven culture with the clinical and financial sophistication to adapt to an ever-changing environment. We apply those first principles to skilled nursing and senior housing alike. We invest for the long term. The price we pay and the operator we choose are intended to result in long-term quality care and as a result, compounding value creation. That solid operator foundation and orientation allows us to grow in a sustainable and accelerated way across our 3 growth engines. Year-to-date, we have already closed on approximately $1.5 billion, and looking forward, the pipeline continues to reload and deal flow continues to be active and interesting across skilled nursing, care homes and shop, both in the U.S. and the U.K. With the balance sheet as strong as it is, the team is stronger than ever before and the opportunity set expanded and great relationships with partners and new and existing high-quality operators, there has simply never been a more exciting time for CareTrust. With that, I'll hand it off to James for a report on investment activity and the acquisition landscape. James?

Thanks, Dave. Good morning, everyone. During the second quarter, we closed on investments totaling approximately $900 million at a blended stabilized yield of 8.9%. That capital was deployed across the full breadth of the platform. U.S. skilled nursing sale leasebacks with quality operators in multiple geographies, the continued expansion of our U.K. care homes platform sourced and executed by our London-based team, further growth in our SHOP portfolio, and relationship-driven real estate loans, primarily to skilled nursing operators, closed either alongside asset acquisitions or in anticipation of them. And as Dave noted, we haven't slowed down since the quarter ended. Since June 30, we've closed on an additional approximately $308 million at a blended stabilized yield of approximately 7.8%. Headlining that activity was a 16 property U.K. care homes portfolio, net leased to a new operator relationship CareTrust, joined by a 2 community $65 million addition to our SHOP platform. Taken together, our 2026 investments now stand at approximately $1.5 billion year-to-date. Breaking that down roughly $735 million in U.S. triple net skilled nursing and seniors housing, approximately $397 million in U.K. care homes, approximately $240 million in loans and approximately $81 million in SHOP. Turning to what's ahead. The pipeline sits at approximately $540 million roughly 2/3 skilled nursing and 1/3 loans to strategic partners plus U.K. Care Home. It's a healthy mix, some singles and doubles alongside mid- to large portfolio opportunities. You'll note the immediate pipe doesn't include shop. That's really just a function of timing and discipline. The team continues to deepen relationships, including with high-performing operators and we are confident these relationships will drive attractive on- and off-market opportunities that we expect to convert in future quarters and give us a long runway to scale that portfolio in both the U.S. and the U.K. And our usual reminder on methodology. The quoted pipe includes only deals we have a reasonable level of confidence we can lock up and close within the next 12 months, and it typically excludes larger portfolios still under review. Stepping back for a moment, what gives us real confidence is that all 3 of our growth engines are producing. In skilled nursing, deal flow remains deep and steady with proprietary opportunities generated through long-standing relationships. In shock, even amidst stiff competition and compressing cap rates, we're pursuing the right assets with the right operators and see a long runway to scale that portfolio in the quarters and years ahead. And in the U.K., our London-based team has widened our aperture considerably, new operators, new sources of deal flow and a pipeline that keeps building. Across all 3, the team continues to surface attractive opportunities to deploy capital, and we like our position in each of these markets. That growth will stay grounded in the same fundamentals that have served us well disciplined underwriting, durable operator partnerships and a creative collaborative approach to structuring. With that, I'll hand it to Derek to walk through the quarter's financial results.

Thank you, James. For the quarter, normalized FFO increased 44% over the prior year quarter to $119.7 million and normalized FAD increased 43% to $118.5 million. On a per share basis, normalized FFO was $0.51, an increase of approximately 19% over the prior year quarter, and normalized FAD was also $0.51, an increase of approximately 19% over the same period. In the second quarter, we raised approximately $364 million of gross proceeds from the settlement of outstanding equity forward contracts to fund investment activity in the quarter. Also in the quarter, we sold 14.4 million shares under forward equity contracts, raising $580.5 million of gross proceeds at a weighted average price of $40.23. And since quarter end, we sold another 2.2 million shares on a forward basis for gross proceeds of $90.6 million at a weighted average price per share of $41.6. As of today, we have approximately 16.6 million shares remaining unsettled under forward sale agreements, representing approximately $671.4 million in gross proceeds available to fund future investment activity. In yesterday's earnings press release, we raised our full year 2026 guidance, reflecting our year-to-date investment activity, including the volume we've closed since quarter end, we're now projecting normalized FFO per share of $2.03 to $2.06, and normalized FAD per share of $2.01 to $2.04. At the midpoint, that represents growth of 16.2% in normalized FFO per share and approximately 15.1% in normalized FAD per share compared to full year 2025 results. Our updated guidance is based on a weighted average diluted share count of 233 million shares and includes the following key assumptions: First, no new investments, loans or dispositions beyond those made year-to-date. Second, no new debt or equity issuances beyond those made year-to-date. Third, 2.5% inflation-based rent escalators under our long-term triple net leases. Fourth, $147 million of loans to be repaid throughout the year, of which approximately $104 million has been received so far to date. And fifth, no material change in the GBP to USD spot exchange rate. Additional guidance measures are detailed in the press release yesterday. Lastly, our liquidity continues to remain strong at approximately $1.4 billion as of today, including approximately $90 million of cash on hand. $605 million of availability under our $1.2 billion revolving credit facility and approximately $671 million of unsettled equity forward contracts. In addition, we have roughly $785.8 million of capacity available under our ATM program. Net debt to annualized normalized run rate EBITDA was 1.0x at quarter end, well below our long-term target range and our fixed charge coverage ratio was 9.9x. We continue to have no scheduled debt maturities prior to 2028. With continued momentum and a reloaded investment pipeline, we have ample dry powder and multiple levers across our capital toolkit to keep funding the recent pace of investment activity. And with that, I'll turn it back to Dave.

Thank you, Derek, and thank you, James, and thank you, everybody. We're really grateful for everybody's interest and support. As I hope you can tell, we are super bullish on the CareTrust story and not just what we've achieved, but where we are headed. And with that, we'd be happy to answer any of the questions that you might have at this time. .

[Operator Instructions] Your first question comes from John Kilichowski with Wells Fargo.

James, maybe if I could start with you. You gave some helpful color in the opening remarks, especially about building out the SHOP pipeline and it not being mentioned in the -- or SHOP not being mentioned in the current pipeline. Could you talk a little bit more about building those relationships with operators and how that will eventually translate into volumes and how we should think about the cadence of that?

Yes, sure. I mean, I think that it's hard to predict the cadence. So not really sure what's going to hit the market or what our market is going to come. But I think that building relationships with these operators and managers, finding the ones you can use in different regions of the country or have proven track records there that have maybe experiences with other publics and their reporting in back office. Just really allows you to more quickly pursue transactions that come up. It opens up the off-market pipeline as you develop relationships with them. And really, as you really start to develop frameworks with them of what your deal with them would look like, the terms on which you do it and you get really all that [indiscernible] so you can react quickly when the right deal and the right area comes up for you to work with that particular operator or manager. And I think the team's done a great job of developing a lot of those relationships and being ready really to continue and ramp up pursuing acquisitions in from parts of the country.

And then would you also mind talking about the portfolio of deals outside of the quote pipeline, maybe you don't want to speak to specific deals, but can you talk about the composition of where you're seeing those opportunities? Or is it more Smith tilted? Are there SHOP portfolios out there that you're currently evaluating? I'm just kind of curious what the composition looks like more than anything.

Yes. I mean there's a few portfolios tinkering around out there. I would say there's 2 SHOP portfolios that are larger out there that we're reviewing to see how attractive they are and whether we want to pursue. And there's also I'd say the same for SNF and 1 or 2 in the U.K. as well. So there's always a seemingly a couple of them floating around, but there are a couple of shoppers out there that we're looking at. But we'll see if they're really worth us pursuing if we think that there's traction there.

Next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

With respect to the Care Home portfolio investment in August, I think this might be one of the largest purchases in the U.K. since acquiring C-REIT. But what I'm wondering is how much of the scale impact pricing? And do you view the yield to open the door to potential future deals given the new relationship there with the operator?

Yes. I mean the scale did impact the pricing a little bit. I would say that it was 16 facilities. It doesn't deal that size and U.K. don't come around all the time. So there's definitely a teeny bit of a premium there. We definitely see it as a launching point with this operator. We feel like they've demonstrated in the past their ability to operate at scale and to operate well at scale. And this is really their first jump back in after selling their portfolio last year. So we definitely see it as a launching pad to grow with them in the future.

And then, Dave, as you think about tenant and geographic concentration, kind of ensuring that you do right diversification, balanced with partnering with the highest quality operators consistent with the above average metrics that you highlighted in your opening remarks, I mean how do you think about striking that right balance moving forward?

Well, I think one of our first principles that started the company was that the underwriting always starts and ends with who is the operator going to be. And if we do not have what we think is a quality operator to match with a great opportunity, we're simply going to pass on that deal. We'd much rather take an A operator in a B market then settle for a mediocre operator in a great market. So that's just in our DNA. That's the discipline we have. And -- if we do have -- which we do have great operators, we don't mind concentration building with one or another because over time, the diversification and concentration sort of takes care of itself. .

Your next question comes from Juan Sanabria with BMO Capital Markets.

This is Robin Haneland sitting in for Juan. I was curious if there are any opportunities to convert the existing senior housing tenants to either shop in the U.S. or U.K.?

We've certainly thought about that. The challenge that we have in doing that is that our senior housing portfolio here in the U.S. and in the U.K. covers rent really well. And so there's very little motivation for the operators to walk away from that type of lease coverage. I think a lot of those conversions that have happened in our space have been kind of from a defensive posture where maybe things haven't been performing super well or there hasn't been really strong coverage. And so it was more of a defensive play to convert to SHOP. So because our cover so well, there's less opportunity to do that. And however, as we look forward, everything is on the table, but I think more likely for us, SHOP will be coming from being on offense and identifying great assets that we really want to own and have operations responsibility for with great partners.

And as a follow-up, I wanted to ask on where things stand with Pac today. What's the willingness to move forward? What have discussions been sort of year-to-date?

Yes. So we're really pleased to see PAC's performance this year. Happy to see them back to normal filing cadence. Really happy to see their investments in compliance and happy to see them back on the growth path. We haven't done anything with PACS for a while, but that's not for lack of trying. We have looked at some deals with them, and we'd be happy to grow with them again if the opportunity presents itself.

Your next question comes from Michael Goldsmith with UBS.

James, in your prepared remarks when talking about the U.K., I think you talked about widening the aperture. So maybe you can provide a little bit more color of what you meant specifically by that.

Sure. I think what I mean by that is that I think the team there has done a great job of going beyond just seeing marketed deals, but also using operator relationships and other relationships they have or that we formed to bring more pipeline or sources of deals than just the traditionally marketed deals. I think also that as you start to look at maybe structures beyond just the triple net, they've done a great job starting to form relationships for us to start looking at deals like that, that might work in other structures like SHOP if something presented itself. So I think, Michael, that's pretty much what I mean. Just opening the way in which deals come to us beyond just traditionally marketed deals and thus really increasing the chances we get more opportunities.

Got it. And maybe just to follow up on John's question earlier about the SHOP in the pipeline, I think you cited timing and discipline. So like obviously, how do you -- like you can only take advantage of the opportunities that you see. At the same time, you are trying to a certain level of discipline around what you're seeing, but then also you know like the underlying strength of the business is so strong. And it feels like everyone is outperforming their own underwriting. So how do you kind of manage that across the portfolio and your opportunities that you're seeing and making sure that you're in on the right deals and then also -- and making sure you're not missing out on things, but also not just acquiring just for the sake of acquiring.

Yes. I mean it's a tough balance, I would say. But I think what we try to do is we try to really look at deals and pick our spots, right? And we try to find those opportunities where we feel like there's real confidence that we have that this can get to an IRR that we really want to pursue and we'll stretch to try to go get it. But on the other hand, we don't feel a huge compulsion to have to stretch to do a deal that doesn't make sense for us. We're finding opportunities to put money to work and really good deals on the SNF side and in the U.K. care home side. And so when it comes to shop, we're going to continue developing relationships, continue to look at and underwrite a lot of deals. We're going to continue to pick our spots with the right partners, operators and stretch to try to go get those opportunities, but not go beyond what we feel is wise or prudent just in the name of growth. So I think we worked really hard to try to those spots knowing that we don't have to do a deal to grow when we've got opportunities with SNFs and care homes.

Your next question comes from Michael Carroll with RBC Capital Markets.

James, just with the increased private market interest in the health care real estate space in general, I mean, how has that impacted acquisition cap rates? I mean, have you seen cap rates broadly drift lower? And is there any one property type or you've seen that more apparent? I know I think in the past, you highlighted there's probably the most competition in the SHOP space. But what have you seen on the SNF space and maybe the U.K. care home space?

I mean, yes, SHOP is pretty well out there. There's a lot more private entrants right now. Cap rates are compressing as a result, you've got more competitive processes. I think in the SNF world, we don't see too much of that really at all. I think you see the same players that there's been over the past several years, same buyer pool, I think, really competing for the deals. And so portfolio deals and SNFs, larger deals, you maybe see a little teeny bit of compression cap rates. But overall, you still see the same where they have been. It's just really having relationships that help you source more off-market because there is more off-market than listed in the SNF world. And in the U.K., I think you do see a slow influx of additional players on the private entrance side for sure. I don't think we've seen it impact dramatically the competitive process. But I would say you see an uptick in buyer entrance, but I haven't seen it really have that much of an impact at all on cap rates or bidding up processes?

Okay. Great. And then I guess, Derek or Dave, can you talk about the purchase options? I know that you have a few meaning your tenants can potentially acquire one of your current assets? I know there was a window that opened up for one specific smaller purchase option, and there's a few that's coming up here over the next few quarters or so. I mean, how should we think about that? Or do you think that those could potentially be executed on? Or is that just an option out there that will just kind of expire eventually?

Mike, we do expect and kind of bake in that there's a high likelihood that those will be exercised. Of course, until we get the notices of exercise. It's always uncertain in people's capital needs and plans change all the time. But I think we're constantly in discussion with those tenants, the options, it's a good relationship, it's collaborative, and it's not the end of the world if they exercise, we always look to do deals down the road with them in the future. But as of right now, we've put a high likelihood that those would be exercised.

Your next question comes from Farrell Granath with Bank of America.

My first one is on the composition of your financing receivables. I know that, that can also refer to your sales leaseback. So curious if what percentage of that is SNFs given that SNF has been a smaller proportion of your acquisition pipeline as outright purchases?