Q2 2022 CareTrust REIT Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Ladies and gentlemen, thank you for standing by and walk through the care Trust REIT second quarter 2022 earnings call at this time all participants.
After the Speakers' presentation there'll be a question and answer session to ask a question during the special need to press star one on your telephone.
I turn the call over to your host Laura.
Yeah.
Thank you take care Trust REIT second quarter 'twenty two earnings.
She'd be weird policies.
But besides that and looking Steve on today's call are based on current expectations.
So we've tried business environment. It operates these statements may include projections regarding future.
And dividends acquisitions.
Right.
And Matt referenced other matters affecting the company's business or the business isn't it.
Yeah.
The control.
And gimmicks, such as co Goodnight.
Governmental actions.
Today, and it generally are subject to risks and uncertainties that could cause actual results to materially differ from those implied herein.
You should not place undue reliance on them.
Statements encourage to review care trusts Etsy.
Discussion of factors that could impact results as well as any financial or other statistical information required by SEC regulation G.
Except as required by law characterize REIT and its affiliates do not undertake to publicly update.
Any forward looking statements where changes arise as a result of new information future events changing circumstances or for any other reason.
During the call will reference non-GAAP metrics, such as EBITDA, <unk>, and F&B or Fad and normalized EBITDA at that's all.
When viewed together with GAAP results. The company. These measures can provide a more complete understanding of its business, but cautions that they should not be relied upon to the exclusion of GAAP.
Yesterday <unk> filed its Form 10-Q, the press release and its quarterly financial supplement each of which can be accessed on the investor Relations section of care trusts website at Www Dot care Trust REIT dotcom.
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, Mark Lamb, Chief Investment Officer, and James Culture Executive Vice President.
I will now turn the call over to Dave Sedgwick characterize <unk>, President and CEO Dave.
Thank you Lauren and good morning, everyone.
Today, we'll give you an update on the progress, we're making on the announced dispositions and on our current outlook for new investments.
With this quarter's supplemental.
We begin to preview what the portfolio will look like after the dispositions are re tenanted work is complete.
Excluding those properties and tenants from the deck.
But before I hand, the call over to James Mark and Bill, Let me comment on the extraordinary time in which we live and operate.
Since we announced plans in February to Derisk the portfolio.
The world has changed quite a bit for us and for our operators.
Surgeon inflation rising rates and daily talk of recession have an impact.
But for us in skilled nursing operators, it's not all headwinds.
For our disposition work, yes, the motivation and ability of some buyers in the market has softened, particularly those dependent on lenders. That's okay, we adapt and run parallel paths of selling and re tenant in and ultimately well.
We ended up with a substantially de risked portfolio.
We're on track to close on most of that work in Q4.
For our investment activity as rates continue to rise and lenders become more cautious we would expect a couple of things to tip in our favor when it comes to growth.
First pricing should moderate and second sellers should prefer the certainty buyers like ourselves present.
We're seeing evidence of that just in recent weeks.
Now as for how today's macro environment affects our operators.
Again, there are two sides to that coin.
On the one hand, the persistence of Covid inflation in a tight labor market make today at time, unlike any of us can recall.
The best operators truly distinguish themselves during times like this.
Historically skilled nursing has been a net beneficiary from recessionary periods, because as the labor market loosens people come back to work.
Now looking at the portfolio, we reported 94% of rent collected in the quarter with cash deposits.
And as for July we collected 94% exclusive of any cash deposits.
August collections appear to be in line with July .
Average quarterly occupancy for skilled nursing operators grew by one 4% or 98 basis points over Q1 and.
And for seniors housing occupancy grew 2.8% or 215 basis points over Q1.
Now as for the regulatory environment, we were encouraged to see the final market basket adjustment from CMS come in better than expected at two 7%.
And we're also pleased to see CMS decided to recalibrate PDP.
Over two years instead of all at once with that I'll turn it over to James to update you on the disposition progress.
Thanks, Dave we continue to actively work on selling re tenanted and repositioning certain assets in an effort to fortify the portfolio.
Since our earnings call in February the acquisition disposition market for skilled nursing and seniors housing facilities has been in a state of change as lenders considered tightening or pulling back on lending due to concerns of a possible recession.
Despite the changing circumstances during Q2 and since we have made meaningful progress on pushing our planned dispositions forward, we have entered into a purchase and sale agreement to sell the skilled nursing portfolio that we have brought to market.
Also signed up several letters of intent and as a result are well into the negotiations on several purchase and sale agreements were also negotiating several LOI and currently we continue to regularly receive written offers from potential buyers that we're considering and evaluating as Dave mentioned in some cases, we've adapted and are pursuing parallel.
Paths of selling and re tenant them with the same ultimate destination in mind are substantially de risked portfolio. We remain on track to close and wrap up much of the disposition work by the end of Q4, and we will provide updates to you as deals further solidify with that I'll turn it over to Mark.
Thanks, James and good morning, everyone.
Q2, we closed on a $75 million Cp's loan.
It is secured by a large portfolio of skilled nursing facilities located in the mid Atlantic at a rate of eight 4% and a term of five years.
As part of the transaction, we also originated $25 million mezzanine loan that bears a rate of 11% for 10 years.
This past Monday, we closed on a $22.3 million bt's secured by five California skilled nursing assets alone as a sofa based rate with a floor of eight 5%.
These fundings bring our 2022 year to date in total for $144 million at an average of approximately 9%.
Looking to the market we've seen it.
And our bread and butter acquisition opportunities for skilled nursing facilities.
Seemingly as the debt markets tightened up and in some instances sellers are looking to buyers that have the ability to check for the acquisition.
This is a shift in the market to prioritizing certainty of close.
Physician, the Reits have not need to wait for some time now.
Despite these shifts we are very careful to underwrite and.
And value assets in today's market as we need to ensure the fundamentals at the facility level are in place.
Or have the ability to reach the necessary key factors for our operators to execute on their business plans for the life of our long term leases.
The pipeline today is in our normal 100 to $125 range with a couple of big deals out there that can push this number up.
As we said before a large portfolio transactions or low probability for us, but we continue to look for opportunities that can be accretive to our operators.
Respective by either adding buildings in our market.
Or by entering a market within our purchasing power to attract the right kind of staff to effectively plan of providing first class rather than cure.
We will continue to execute on our acquisition strategy of disciplined growth just as we have over the past eight years in building care Trust and now I'll turn it to bill to discuss the financials.
Thanks, Mark as previously mentioned good progress continues to be made on our dispositions when they firm up and we begin announcing the multiple expected sales deals, which will make a forward looking financial picture a little more clear I would expect that we would resume publishing guidance in the meantime stay tune for the ups.
Disposition announcements.
Now onto the quarter and a little color on the numbers.
For the quarter normalized <unk> slightly decreased <unk>, 7% over the prior year quarter to $35 6 million normalized <unk> slightly decreased by one 7% to $37 $5 million.
On a per share basis normalized <unk> was flat over the prior year quarter at <unk> 37 per share normalized <unk> slightly decreased by two 5% to <unk> 30 per share.
Rental income for the quarter was $46 8 million compared to $46 million in Q1.
The increase of 800000 is due to the following three items.
One.
253000 decrease in cash rents, which is made up of unpaid rent of 916000.
Set by an increase from new investments and CPI bumps of 663000.
Two an increase in reimbursed property expenses of 77000.
And three a decrease in write offs of 977000 as we had none this quarter.
Interest expense was up 561000 from Q1 due to a higher LIBOR rate, which accounted for most of the increase totaling 502000 and higher borrowings under our revolver, which made up the remaining 59000.
G&A expense was down 237000 from Q1, two to compensation related items of 655000 offset by other corporate related items of 418000.
I am expecting this year's G&A to be around $20 million.
Cash collections for the quarter came in at 93, 9% of contractual rents and includes the application.
Of 900000 security deposits without the application of the security deposits cash collections was 92, 1% of contractual cash rent and.
In July we collected 102, 1% of contractual cash rents due to operate due from our operators, but that percentage includes cash deposits. Excluding those cash deposits contractual cash rents collected was 94, 1%.
We expect August collections to be similar to what July was with zero dollars coming from the application of security deposits.
Our liquidity remains extremely strong with approximately $16 million in cash and $385 million available under the revolver leverage also continued to be strong.
With net debt to normalized EBITDA ratio of four three times, our net debt to enterprise value was 32% as of quarter end and we achieved a fixed charge coverage ratio of seven five times and with that I'll turn it back today.
Thank you Bill we hope this discussion has been helpful. Thank you for your interest and support.
Yes.
Be happy to take your questions.
Ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone keypad, we will pause for a moment, while we compile the Q&A roster.
Our first question comes from Austin <unk> with them.
<unk>.
Keybanc capital markets. Your line is open.
Great. Thank you guys.
It sounded like in the release you talked about running this parallel process.
And there is a chance that.
You could re tenant maybe.
More of these assets than maybe it seemed like.
30, 60 days ago. So I guess I'm, just curious first am I reading that correctly and then given your comments about still some strength in the transaction market why not sell into that strength.
I'll start and you guys can clean up for me.
I would say to this.
Pretty fluid.
Not just on the.
The buyer's ability.
But also.
Yes.
<unk> ability to step in.
In some cases, where we are today with the particular operator.
That we might.
It might liked would've liked to mint originally maybe there is a lot stronger today than they were at the start of the year and that option to retain.
Sets.
For those into an existing lease.
<unk> are pretty attractive.
In some cases at it for that reason in other cases, we're looking at it because.
Just in an abundance of caution we want to have a solid plan b in case somebody on the buyer side.
We will software this.
Got it and then how much of that Dave is a reflection too of just you know you saw some improvement across the portfolio and fundamentals.
A factor and how should we think about.
The timeline or process that it would take to re tenant and sort of.
Get things underway and get the improvement versus being able to redeploy that into a more stabilized type deal.
Stabilized acquisition.
Yes, the interest in the first part of your question I'd say it does have this half.
A part of as we do see some operators portfolio proving that gives them.
Sort of a mind shift in mindset to shift from defense to offense.
And there might be an opportunity for.
From a timing perspective, it's always going to be quicker generally speaking to re tenant then to go ahead.
Our sales process.
So in any event like James mentioned, we feel like even though things have.
Got pushed a month or two.
Because of how the world has changed we're still confident that.
This work should be done by year end.
That's helpful. Thanks for the time.
You bet one.
One moment for our next question.
Okay.
Our next question comes from Steven Valiquette with Barclays. Your line is open.
Alright, Thanks, Hello, everyone. Thanks for taking the question.
I guess my question is kind of built a little bit on the first one I guess as you think through all the scenarios in that last comment you made about <unk> being quicker than asset sales and then having to redeploy that.
I guess I'm, just curious how you or how high you value the avoidance of dilution and all your decision is around this versus just doing what's right for the company longer term.
Got it consensus right now still has numbers going up.
Pretty meaningfully versus.
23 versus 22, I know, you're not giving any guidance today, but how should we just think about.
Short term dilution around this whole process versus what you thought six months ago, and just any updated thoughts around that at a high level would be great. Thanks.
Yes, Thanks, Steve.
I think our mindset has not changed.
We've made the decision to.
Run this asset management and disposition.
Derisking process back in February we Werent, just being reactionary to the the couple of operators that couldn't pay we also looked at.
And tried to predict who else might.
Have difficulty.
And our preference and so that's kind of how we came up with the group of assets and the operators that we did.
Our preference I would say, it's still too.
Go through with disposition.
Overreached Tennant team in most cases.
Because in our analysis long term, we think that that's going to produce.
Yeah.
Most benefit for earnings.
In other words the luck.
The analysis of.
What's the future rent from redeployed assets redeployed sales versus what's the earnings from re tenant team at a lower rent.
That's the crux of what we look at.
And our bias is always going to be toward the long term.
Financial strength of the portfolio.
Okay that definitely helps the frame that better so I appreciate it that's it for us.
Thanks, Steve.
One of my next question.
Our next question comes from <unk> <unk> with BMO. Your line is open.
Hi, good morning, Thanks for the time.
Just curious on the transactions market you kind of spoke sure change recently.
So what do you think that actually means in terms of where cap rates could be and our coverage levels could be.
If youre able to kind of reengage in traditional preclinical acquisitions for either senior housing and skilled nursing I'm not sure how the pipeline is skewed.
Yes, I think I said.
I think cap rates are.
Probably not.
Not moving as quickly.
Just because I think what we're seeing as Dave mentioned.
This phenomenon in the recent.
Our recent weeks.
Really what's taken places I think.
Carl.
Call traditional buying marketer or bank lending market lenders are pulling back maybe not going as high on the capital stack and obviously rates are right. So.
So I think just we're starting to see some inbound on opportunities where somebody.
Maybe either either club up with us.
Or maybe they want to sell a.
A couple of assets to us.
Or even brokers, calling us because they know we can write the check so I think it's too early to say exactly where where cap rates are going I think we're starting to see.
<unk>.
A shift from kind.
Kind of.
The auction process multiple rounds with the best and final.
And numbers call. It in Q1 that were.
Kind of all time highs two to now more of a softer market where.
Where folks value are transactional.
Acumen.
Our user friendliness.
And our ability to to write the check so I think it's I think it's too early to say on exam.
How fast.
Cap rates in a rising malls per bed pricing is dropping.
We don't quite have.
It's still a moving target but.
I think we'll know over the coming quarters.
Just a point there you said pricing per unit is dropping.
I just wanted to clarify that.
As the price per bed is in some markets, we're starting to see.
Yes.
Substantially.
Okay.
And then just maybe a clarification on the point made on the prepared remarks.
Okay.
I'm not sure if I misunderstood the did you say in August .
No security deposit is expected in terms of helping the cash rents is that because the security deposit.
So the clarification there.
No what I meant was.
We expect cash collections to come in.
<unk>.
Which does not include using any security deposits.
Great. Thank you and then one quick one.
<unk>.
I noticed noble dropped off the top tenant list is there.
Is that because they are part of whats anticipated that you said that the supplemental has changed or just curious on that driver.
Yes, so the change in the supplemental this quarter as previewing, what we expect it to look like pro forma of the.
The disposition and re tenanted and work to be complete.
Okay. Thank you.
One moment for our next question.
Our next question comes from Dave Rodgers with Baird. Your line is open.
Hi, Yes, good morning out there, Dave maybe you could talk a little bit about originating more loans versus acquisitions of your more traditional product, obviously that was skewed one way in the quarter and year to date, but how do you view that with this emerging acquisition pipeline are you still balanced between them or how are you leaning I guess at this point in time.
Yes, I think we're always leaning into the traditional acquisitions.
Our bread and butter, that's our mandate.
Real long term growth.
Yeah.
This year lending the debt investments has been.
Great and important Avenue for us to put money to work in the absence of those.
Traditional opportunities.
And.
And it has also provided us an opportunity to deepen our relationships with some operators that we've admired for a long time or that we already have in our portfolio.
So as we go forward, though what we want to be conscientious of is really what charity schedule looks like because if you have.
50 million coming due in.
2027.
And then you got it right.
$50 million in 2027.
And once you've done that you haven't grown you've kind of been on a treadmill. So we kind of view.
That strategy for us is.
Important.
Relationship building.
And continuing to be the story operators there.
Yes.
We like and want to support.
And their ability to improve the sector.
As we move forward, though.
<unk>.
We want to always prioritize.
Long term.
For.
Over that so it will be.
B.
But just keep in mind as we have other opportunities to put money to work.
Right now the term.
What we've done we've got money coming in.
Sure.
Debt.
We have terms that here's five years and 10 years.
Yes.
There is still there is still.
As you look for.
Opportunities to put money.
To work on that side, but we will like I said we're.
We're going to prioritize the butter.
Acquisitions.
And maybe just a quick follow up on that I think.
You've talked about maybe just kind of branching into different product types that would still fit within.
Behavioral health and other things.
Is that part of this investment pipeline or is it really the core of what you have historically done that's emerging where that maybe becomes less relevant.
Currently 120.
Five I'm not sure that I don't think Theres any health in there today, but when we do quote it.
Now in.
In the future we will being.
Those types of investments.
Our pipeline, we do expect.
To.
Pursue for health investment.
And.
We would like to grow.
Throw that Tim I'd say, we're kind of in the early <unk>.
Putting that operator, which together I can skilled nursing and seniors.
Having a great bench of up.
Will it be.
Critical to be able to grow that.
For us.
Thanks, Dave.
Thank you.
One moment for our next question.
Yes.
Our next question comes from Daniel Bernstein with capital One your line is open.
Okay.
I guess I have another follow up on the pipeline as well.
Trying to understand maybe a little bit.
The opportunities are coming from are they coming more from your existing operators or <unk>.
Kind of what you alluded to with the tightening lending standards for lending market that you're having a bunch of new potential relationships coming your way.
Yes, I think it's I think it's brokers.
We've worked with in the past.
Yes.
Buyers that we worked within the past as well as operators that are that are bringing us.
No.
Not really one.
A subset.
Yes.
It's really it's really kind of everybody so.
Okay. Thanks.
And to that Dan.
No I think years, we've tried to.
To be the best transactional partner, we can and in some instances maybe maybe there is a need for us just to ride shotgun on a transaction if the building and building.
In some instances and pretty early and get us get to underwrite and have a little bit more time to kind of think about.
<unk>.
Parents buildings with the operators and Msos.
And that's a little bit more of a prolonged process.
It's really kind of everything everybody and anybody that we've worked with in the past.
Okay.
Okay.
Not everybody, but we've received some inbounds from from folks that we have relationship existing relationships.
Okay.
And then I have a question on how youre thinking about potential wage growth within those seniors housing it seems spacing. It seems like you know what.
Could the job report today, there were some pretty good hiring in healthcare I think.
Some of that has to do with wages and total comp for seniors and snips coming up to where.
Broader healthcare space suspended so.
Do you think maybe you should expect some moderation in wage growth.
And the senior housing and sniff space.
You would think so.
I think from.
Analysis of our portfolio, we saw wages peak.
I think in March February and March and it has come down somewhat modestly since then anecdotally as we've talked with.
As recent as yesterday.
What we're hearing is that applications for jobs are up.
Agency usage is trending downward.
Scope with an operator.
The East coast, the other day, who said that they are.
Now okay.
Hiring everybody at their facilities seniors housing operator.
The historical rates before the big Spike.
So while.
It's still elevated I think it's.
We're starting to see some signs that.
Wages are moderating again.
Okay.
That's all I have thanks a lot.
Thanks, Dan.
One moment for our next question.
Our next question comes from Tayo Okusanya with credit Suisse. Your line is open.
Okay.
Hi, yes, good afternoon, everyone.
So a couple of quick ones for me.
The first one is.
Well.
We all realize that there's still a lot kind of going to transition right now.
Again some of your peers.
I've gone through similar things and I think some of them have kind of given us some sense of.
Net net what the impact is what they were.
Let's see who they are.
Revenues from the expected combinations of sales and re tenant seeing yet.
<unk> kind of new reps.
Yes.
At the point, where you can kind of provide some color.
With regard to that when this is all kind of said and done.
My sense is that we will have we'll be in a position to do that on our next call.
But at this point there is I think it's just a little bit premature I think.
<unk> to our peers.
It's probably fair to say that.
We started this.
<unk>.
Asset management and <unk>.
Sure.
Restructuring work.
Much later than they did.
And so.
A little bit of a tough apples to apples comparison, but as soon as.
As soon as we can which I think will be next quarter, we'll be able to give you a little bit more than we have so far.
Fair enough.
Then.
Stripping out the 27 assets and taken a look at the sub.
You still have.
A handful of tenants, where the rent coverage still kind of gates kind of at or below one times.
Some other comments opening the opening remark comments you made were helpful. But I guess at the end of the <unk>.
How do you look at those two tenants relative to.
Your outlook, both for skilled nursing and senior housing.
Yes, so as you look at the subs.
We see a handful of players that don't have the coverage that we would like to see I think one thing I would.
Point out is the timeframe here is through March of this year, which really reflects.
Some of the hardest hit.
Quarters and periods for our operators as it relates to Covid.
And the labor market and all of that so it is.
It is a pretty tough period to look at.
Historic look back at that period as maybe the toughest for our operators.
If you look if you drill down at the individual operators and our top 10.
What I can tell you is that based on our.
Ongoing and regular conversations with them.
And what I would characterize as a very healthy positive and transparent relationship with.
Each of those folks that are in our top 10, we really have concern.
Default in the short term.
There if you look down.
At the all other tenant list you see.
Looking at the EBITDAR coverage, excluding HHS funds <unk> 99 times for all other tenants.
A little bit of color on that for you Tayo.
If you take out just one operator.
Who actually has negative coverage.
Nine times.
It goes to 175 times.
And the total <unk>.
Portfolio coverage goes from 2.02 times in that column.
Two.
Kevin.
Yes.
Operator.
Part of the 32 assets that we've talked about something with although we.
Talked with them about pursuing that early on in the year.
They are working through a turnaround plan.
And our current with Rep.
And continue to show.
<unk>.
So that's some color on our coverage slot okay.
That's actually very helpful.
Then one more if you could indulge me please.
So the.
Oh.
The color you guys gave about again that market is getting tougher to kind of give us some advantage on the acquisition side I mean on.
On the flip side again, it also kind of I think a bunch of sellers out of the market and you guys are trying to sell.
A sizable portfolio so.
Curious again, if that's part of what's causing this dual track issue number one and then number two.
How does the potential sellers out there go about underwriting this pool of assets.
The rent coverage is particularly low.
Hey, Todd its mark.
I would say is we have.
Not as if we have a concentration.
A concentration of assets in a particular state so you have a.
A couple of assets here couple of assets there.
<unk>.
Bob operators that are looking for.
These assets.
Can tell a story to a lender.
Can point to existing communities, maybe in a market or neuro market.
That will give a new lender confidence.
To give them a break.
And so a little bit better of a story.
In addition perspective with the new operator, coming in and existing operator trying to sort of recap recap their own their own debt. So I think youre right.
The market is moving.
But I think the advantage in some of these assets that maybe aren't performing.
Where they cannot.
And has had.
The momentum in a particular market.
Great. Thank you.
Thanks Tayo.
And im not showing any further questions at this time I'd like to turn the call.
For any closing remarks.
We really appreciate the support at the time the interest and.
And if you have any blip, you know where to find us have a great week.
Ladies and gentlemen.
Today's presentation, you may now disconnect and have a wonderful day.
Thank you.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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