Q4 2022 CareTrust REIT Inc Earnings Call
Yeah.
[music].
Good morning, My name is Devin and I will be your conference operator today at this time I would like to welcome everyone to care Trust announces fourth quarter and full year 2022 operating results conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
We'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question at any time press the pound key.
Thank you for your patience I'll now turn the call over to senior Vice President Lauren Beale you may begin the conference.
Thank you and welcome to the character three fourth quarter <unk>.
Earnings call participants should be aware that this call is being recorded and listeners are advised that any forward looking statements made on today's call are based on management's current expectations assumptions and beliefs about characteristic and the environment in which to operate.
These statements may include projections regarding future financial performance dividends acquisition investment returns financings and other matters and may or may not referencing other matters affecting the company's business or the businesses of its tenants, including factors that are beyond their control such as natural disasters.
Such as COVID-19, and governmental actions the company statements today and its business generally are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied herein.
Listeners should not place undue reliance on forward looking statements and are encouraged to review <unk> SEC filings for a more complete 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 characters REIT and its affiliates do not undertake to publicly update or revise any forward looking statements or changes arise as a result of new information future events changing circumstances or for any other reason.
During the call the company will reference non-GAAP metrics, such as EBITDA, SFO, and F&B or Fad and normalized EBITDA <unk> and <unk>.
When viewed together with GAAP results. The company believes 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 reports.
Yesterday characterize filed its Form 10-K, and accompanying press release and its quarterly financial supplement each of which can be accessed on the investor Relations section of characterize website at Www Dot care Trust REIT Dot 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 Dave <unk>, Chief Investment Officer, I will now turn the call over to Dave Sedgwick character, three President and CEO , Steve. Thank you Lauren and good morning, everyone.
Many of the themes from last quarters call are still applicable today.
Starting with the macro dynamics at play the Feds response to inflation has had a significant impact on the credit market as intended.
Even with our sector, leading leverage the rapidly risen rates undeniably eat into earnings and slow what has also been a sector, leading <unk> per share growth rate over the past five years. The good news is that even with the elevated cost of capital, we can still make accretive investments and intend to do so.
And positively as we mentioned last quarter, the flip side of the tighter credit market continues to be a tipping the scales in our direction for brokers and sellers, who are looking for certainty to close.
Our operators are also poised to find some relief to the staffing challenges if and when a recession begins to drive people back to work where jobs are secure here in health care.
Rent in the fourth quarter came in at 95, 5% inclusive of about 750000 of deposits applied.
Today I am pleased to report that of the original 32 assets, we identified as candidates to sell or reposition or restructure.
We've made significant progress with only a handful of smaller assets remaining on the market.
We provide a detailed update in our supplemental but I will emphasize a few key points here ultimately after running an exhaustive process. We sold 13 properties and decided to retain 14, leaving five facilities on the market.
The 13th sold for $68 8 million those properties paid essentially no rent in 2022.
For the 14 properties retained in 2022, we collected about $5 2 million of $8 6 million of contractual rent.
For 2023, we estimate that eight of these 14 will produce cash rent of about $3 5 million.
We hope to give more clarity on the timing of rent commencement for the remaining six.
Next quarter.
That leaves just five smaller seniors housing facilities from the original 32 that as we sit here today are still on the market.
Two of those are under contract to sell.
One is under LOI.
Moving to being actively marketed.
These five assets on the market only one paid rent last year for a total of $377000.
In terms of portfolio strength, Youll see a portfolio with the top 10 tenants, who represent 89% of contractual rent.
With property level EBITDAR lease coverage of two one times, excluding HHS funds.
We have confidence in a few operators in the top 10 that on the surface appear vulnerable and believe it's just a matter of time until their results reflect the hard work they've been putting into turn certain facilities.
Last year, you may recall us repeatedly talking on this call about elevated risk associated with one Midwest skilled nursing operator outside of our top 10.
<unk> had negative lease coverage for quite some time.
They account for two 8% of rent.
As of 12 31 annualized.
In 2022 due to partial payments, we applied an exhausted their $1 2 million security deposit.
And no rent payment has been made for January or February yet.
A week ago, they informed us of a change in CEO .
And the need to work together on a plan that works for both of us.
We've just started active discussions with them about the best path forward and.
And we expect to have a concrete plan to share with you next quarter.
Like I highlighted before without this operator, our EBITDAR lease coverage outside our top 10.
It goes from 1.08 times to 184 times, excluding HHS funds.
Considering the toll that Covid has taken on our sector. The way the vast majority of our operators and manage through these past few years is gratifying on many levels and we feel proud to affiliate with some of the best operators in the country in both large and small.
The strength of our company enables us to turn more attention to external growth this year.
So as we begin 2023, our strengths continue to be our balance sheet, our portfolio and our experienced team.
With that I'll turn it over to James to update you on our investment outlook.
Thanks, Dave and good morning, everyone.
Looking at the market, we continue to see an uptick in seniors housing skilled nursing and behavioral deals coming across our desk.
Many of the facilities being sold consist of distress seniors housing assets with owners that are facing high interest variable rate loans and have to exit.
Deal flow continues to increase on the skilled nursing side with incoming transactions, primarily consisting of a single to a few assets that are non strategic to the seller or at some stage of operational distress.
We are also seeing a few smaller portfolios from operators looking to sell as they exit the business and a few larger portfolios in states, where Medicaid rates remain very low.
Some Reits and private equity owners are also disposing of assets to help operators shed negative cash flowing assets are assets that are no longer geographically strategic <unk>.
These trends may accelerate with the end of the public health emergency.
We expect the upsurge in deal flow to continue with sellers, placing an emphasis on certainty of close and low execution risk.
Price discovery continues though we are seeing signs that motivated sellers are starting to adjust expectations in some cases.
We will remain disciplined as we look for further adjustment to seller expectations, given the high interest rate environment tightness in the debt markets and other factors.
With our strong balance sheet and access to capital we are poised to pursue actionable acquisition opportunities with a focus on those states with favorable Medicaid rates and access to labor and where we have a strong bench of existing operators or where we are actively pursuing new relationships with operators, we have long admired our commitment.
A side by side underwriting approach with our operators will be more important than ever as we face the challenges of underwriting labor occupancy and other difficult assumptions in the current environment.
Turning to the pipe. It currently sits in the $100 million to a $125 million range as we sit here today. The pipe is primarily made up of skilled nursing, but also includes some seniors housing assets. The deals includes some of our standard 1% to two facility acquisition opportunities. In addition to small or medium sized.
<unk> that would allow us to not only enter new states, but also expand in states, where we have a limited presence and with that I'll turn it over to Bob.
Thanks, James for the quarter normalized <unk> decreased 8% from the prior year quarter to $37 million normalized <unk> decreased by one 9% to $39 million.
On a per share basis normalized <unk> decreased a penny to <unk> 38 per share.
<unk> also decreased to <unk> to <unk> 40 per share.
Rental income for the quarter was $47 7 million compared to $47 million in Q3 the.
The increase of 657 and is due largely to the following four items.
One.
We received approximately $1 3 million of cash related to a prior tenant that was recognized in the quarter I expect a little more of this in Q1 of 2023, but it will not be material.
Two an increase in rents from CPI bumps of 182000.
Three a decrease in cash collections of 427000 from tenants, who are on a cash basis of accounting and for a write off of straight line rent receivable of 440000 relate.
Relating to a tenant we move to cash basis of accounting during Q4.
Interest income was up 860, <unk> due to the originations we closed in Q3.
Interest expense was up $1 3 million from Q3 due to higher interest rates of $1 5 million slightly offset by lower borrowings under our revolver.
During the.
We took an additional impairment of $5 4 million.
G&A expense was down 346000 from Q3 due to lower compensation expense of 618000 offset by other corporate related items of 272000.
Cash collections for the quarter came in at 95, 5% of contractual rents and includes the application of 750000 security deposits without the application of the security deposits cash collections was 94% of contractual cash rent.
In January we collected 94, 5% of contractual rents due from our operators.
A couple of notes regarding the balance sheet in Q4.
We issued $2 4 million shares under our ATM for gross proceeds of $48 1 million and we extended our revolver another four years.
Our liquidity remains extremely strong with approximately $20 million in cash and $465 million available under our revolver.
Average also continued to be strong with a net debt to normalized EBITDA ratio of three seven times, which is below our stated range of four to five times.
Net debt to enterprise value was 28% as of quarter end and we achieved a fixed charge coverage ratio of six five times and with that I'll turn it back to Dave.
So we hope our reports been helpful and thank you for your continued interest and support and happy to answer your questions at this time.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Our first question comes from Jonathan Hughes with Raymond James.
Hey, good afternoon, or good morning out there.
I was just hoping we could talk maybe about the outlook for this year and I know you've given us some building blocks.
How things are expected to play out.
Why not give us.
The official guidance it seems like we have a 95% of what we need.
Obviously, there's still a few properties left to sell or re tenant and figure those out and theres, obviously that 3% or so operator that havent paid rent since November .
And you get the models not that complex and we can certainly make our own assumptions, but just trying to understand what's preventing you from <unk>.
Presuming youre tradition of giving annual guidance.
Yes so.
Thank you.
You've kind of pointed to the answering your question, we feel like there is still enough.
Uncertainty around the timing.
When rents are going to commence with these retained facilities.
And the outcome of this.
This Midwest operator that we talked about.
To not issue guidance yet.
But we're hopeful.
That in the next quarter, we should be able to do that because I think by next quarter.
We will have a lot of clarity.
And <unk> agreed to and so then.
As soon as we're able to which I think will be next quarter, we'll be able to issue guidance.
Okay.
That sounds good.
Then on <unk>, maybe remind us of the quarter.
Certainly well.
Yeah.
That Midwest operator.
The two 8% operator that hasnt pesos since November are they still on accrual accounting since I don't think I saw a straight line write off.
In the quarter and.
And so does that mean at this point you are still hopeful to recover what's not been paid and maybe there is a chance that the discussions progressed they.
They will commit to the current rent under under the new CEO as he said and also I think they have some pretty strong financial backing.
Yes, they are.
They are on cash accounting they are not non accrual.
And.
The conversations with the group over there is very.
Fresh.
We literally got the news from them last week.
<unk> CEO .
So it's hard to handicap, how this year goes although I will tell you that they are expressing to us.
Our commitment to the portfolio and to the turnaround.
Yeah.
Sure.
This operator.
It's primarily operating facilities in the state of Iowa, just to give you a little bit more color on them.
And I was so far has really proven to be one of the least supported states in the country for nursing home providers.
Like other states they refused to pass on any of the F map federal funds.
I saw a report last week or in recent days were about 39, Iowa in nursing homes have been closed in the last couple years.
So that made it makes the environment pretty difficult. However, there is reason for hope.
Theres, a medicaid rate increase going into effect. This July .
But for some it's just going to be too little too late.
So we're going to be.
Working with this operator to figure out a path forward that that makes sense for both of us.
But it's so early in those discussions that we just.
We can't really give you an indication of how it is going to play out yet.
Okay.
I mean, it's just one more it has been a while.
You've used the ATM to raise equity, but you did some in the fourth quarter.
And at those levels low teens premium to NAV.
Those seven implied cap rate, how do you think about raising equity proceeds with no publicly identified opportunity to deploy that capital can we expect that trend as well.
<unk> to keep paying down your facility to create more capacity.
And more optionality for future external growth.
Yes, I think look we saw.
We saw a pipeline that we feel like is going to be able to.
That we feel like we'll be able to execute on.
The coming months.
And so with the visibility into that.
And the ability to pay down the line a little bit it just made sense to pull that ATM sugar in the quarter.
Alright, I'll look forward to hearing a lot more next quarter, thanks to the past.
Yes, Jonathan.
Our next question comes from Austin, worsening with Keybanc capital markets.
Hey, good morning, everybody just wanted to go back to that Midwest, operator, Dave I believe in sort of past discussions you have.
Talked about that roughly about $5 $5 $5 million contractual rent there being maybe a couple million dollars delta seemingly.
At risk relative to maybe where market rent would be based on facility level performance and I'm. Just curious if that's still the right sort of.
Range.
Today and then.
How are you thinking about potential rent cod or even looking to sell these communities.
Yeah, I don't think our view on the on the value of these buildings is really changed over the last few quarters their performance as Stan has stayed essentially.
Actually.
The same with negative EBITDAR.
So youre looking at.
Portfolio that would.
Value probably on a per bed basis, we've taken to market.
But in terms of.
What we'd be willing to do its just given where we are in the discussions is not something that we should be talking about publicly yet.
That's fair and then switching over then to the eight tenants that you retained I guess on one hand, you clearly flagged needs within your original sort of portfolio optimization grouping. So presumably there was something about these assets that wasn't optimal but they.
They did pay all of their contractual rent in 2022. So can you just shed a little bit of light on the need.
For the for the rent cut and sort of how you landed on the magnitude of that cut to be sure that there is sufficient room going forward.
Yes, great question.
And I appreciate the way you laid out the question because youre right. There was something in these buildings that we saw.
Early on even though they were current with rent.
If youll remember this time last year, when we announced the plan for these 32, we said we were responding to a couple of operators that.
<unk> hit the wall and then that caused us to look at our.
The rest of our portfolio and sort of try to anticipate who was going to be next.
And these operators or facilities made that made that list.
They paid.
They paid rent in the year, but that was largely.
Subsidize with government stimulus.
And.
If not for that we would not have received the full contractual rent in the year.
And as we look forward to this year, then we say okay.
What is it going to take to keep these guys current to keep them.
Engaged and incentivized to run these buildings as well and I think that's the number that we arrived at.
We very well may revisit, bringing these assets to market when conditions improve for buyers.
And we've set a rent and come to an agreement that gives us the right.
To either sell or re tenant.
At any time.
Yes.
Thanks for that and then just last one with respect to kind of the rest of the retained facilities.
I'm just wondering if you could give us.
The rent commencement on the four specifically is it 23 event is it more likely at 24, then just even some range, even though I know you don't maybe know specifically today when.
That may have that.
When that May occur and then also curious if these now will be reflected on sort of.
Cash or.
GAAP basis going forward. So we can understand sort of the <unk> impact.
Once one rent does commence.
Yes, so I would expect.
Sure.
Of the four re tenanted that are shown in our supplemental 825000 for year, one contractual rent.
That we would see some of that this year.
And.
Again, I'm, sorry that we can't be more clear on the timing of that.
There is some licensing requirements that need to get checked in.
Sometimes those things take some time, but.
But yes, I would expect that we will get a chunk of that <unk> 25 this year.
Then once all of the redevelopment and re tenant in transitions are complete.
The properties will produce as it shows up.
Full year, one rent of $5 seven Unfortunately, I can't give you today the timing of that.
Five seven really starts but that will be followed by a step up in year two.
Six seven.
And yield Youll have a better idea I think next quarter of the timing of when we'll get all of that.
Rent commenced.
Helpful. Thanks for the time.
You bet.
Yes.
Our next question comes from Steven Valiquette with Barclays.
Yes.
Great. Thanks, Thanks for taking the question.
I guess first in the earnings release today, you guys went out of your way to sort of flag. The official end of the pag coming up in May.
You discussed how it could cause some additional displacement will lead to some property acquisition opportunities, which is obviously the positive side of the equation.
I guess on the risk side I can't remember if you guys shared any color around this previously but.
Knowing it's a moving target and you guys, taking the time to determine internally what you think the average.
Percent impact might be on EBITDAR for the average sniff provider.
Particularly to some of the benefits related to the phe.
Do you think it's material or not material because you guys also talked about the <unk>.
Some states implementing some policy to support.
Or make up for what's going to be lost in the phe, we just want to get your thoughts around that as far as just.
Potential impact on coverage ratios just average EBITDA on the back half of 'twenty three 'twenty four.
Yes, thanks for that question, it's a good one.
Bit of a crystal ball question, that's hard to answer because there are so many.
<unk> at play in the answer really depends on the state that you are in in some states I think it's going to be.
Sort of a non event.
Particularly for those operators who are already.
Operating at the historical skilled mix numbers.
Those states have already put in.
Medicaid rate increases.
And.
And so it really shouldn't be that big of a deal.
In some states and others that might be so it really it's hard to answer for the industry.
On an average.
Some operators in some states will be negatively affected.
I think others.
It won't be that big of a deal for them.
Okay for your portfolio do you think it move the needle on the coverage ratios or do you think it can be absorbed just offset by other factors.
Think about just steel.
Forward progression of your.
Reported coverage ratios for the next six to eight quarters, I guess give or take.
Yes.
I think on the on the whole net effect it should have a negative effect on lease coverage.
Just because theyre going to be those who.
Who.
Theoretically there is skilled mix will probably come down a little bit.
And.
If occupancy stays flat then by definition their margin is going to is going to be eating away a little bit. However.
Occupancy continues to recover which we're seeing signs that it's while slow steady recover recovering.
That could offset it so it's it's a little bit tough to.
Tough to handicap frankly, yes.
Yes, yes, no doubt about it okay I appreciate the color that in the meantime, it's definitely helpful. Thanks.
Thanks Steven.
Our next question comes from Michael Carroll with RBC capital markets.
Yes, Thanks, Dave can we talk a little bit more about the 14 properties that are you planning on retaining about where in the portfolio optimization plan.
How many different operators are those going to and are those going to be new operators operating those facilities versus the ones that were in there previously.
So in the 14.
We have.
A couple of operators that are are are.
Coming in new.
Transitioning from the prior operator.
We have the two conversions.
Two behavioral health. So those are going to landmark and new operator for US and then among the eight properties that are retained.
We classify as retained type.
Those are staying with the two operators there.
And then are those how many of these are senior housing versus skilled nursing. It sounds like two of them are behavioral, but how what's the breakout.
Of the 14 Theyre all seniors housing.
And the two behavioral or seniors housing that are converting into behavioral.
Okay, and then of the $3 5 million of rent that you would expect from the eight did that commence or have they been paying that and in the fourth quarter.
Is that going to be continued to be paid through January are or is there a different timing of that rent commencing or ramping up throughout the year.
Thats commenced as of January one.
Did they pay that in the fourth quarter.
It's a step down from what they paid in the fourth quarter.
What did they pay in the fourth quarter.
Okay.
The difference there on slide seven where we show that 2022 contractual rent of $5 one <unk>.
It goes down to three point.
<unk> hundred eight.
Okay, Great and then on the two 8% tenant.
I guess.
When did those I guess, how much of that security deposit was paid in the fourth quarter did that reflect their full contractual rent in the fourth quarter or did they short pay their contractual once in the fourth quarter, even if you exhausted that security deposit.
Yes, so this operator.
They made a partial payment in the fourth quarter and so their last payment to US was in November .
And then you said you would apply that exhausted the one 2 million security deposit did that reflect the full contractual rent payments and the entire fourth quarter.
No let me sorry for the confusion on that.
We in.
In the fourth quarter, we applied about 700000.
750000 of their security deposit to make up.
What was what was do they still ended up a little bit short for the year.
But.
Security deposits for this operator was applied if memory serves in the first quarter in the third quarter and in the fourth quarter.
And so what would happen is we would apply security deposit in the first quarter.
And then they would make up for that they would replenish it.
And then in the third quarter same type of thing that would make their payments replenished part of it and so it was and it was sort of an ongoing.
Late payment situation, which is why.
We started really talking about them in August last year about being elevated risk.
Okay, and then I guess I know you've kind of talked a little bit about this on the call. So I'm not sure. If you can you can answer any more details, but whats the ultimate plan I think we're just waiting to see if they can recover.
And we're seeing if they can start repaying ranked as soon as the results start to recover from that or is this a potential sale opportunity that you've seen in the marketplace.
Yes, sorry, Mark it's just too early to comment on it.
Conversations about a weekend.
Okay, great. Thanks, I appreciate it.
Alright.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Our last question comes from Juan Sanabria with BMO capital markets.
Hi.
Just a follow up to Mike's line of questioning so what was the total amount of rent.
From the two 8% tenant in the fourth quarter.
750 carriers from the security deposits.
Well Im guessing there is about one in a quarter.
Inclusive of the security deposit.
Okay, Great and then.
Alright.
I'm sorry.
One two.
Okay.
And then.
Just curious if you could talk a little bit more about the acquisition pipeline.
Where do you think cap rates have moved to or where theyre heading to for.
You're kind of a $100 million pipeline that you talked about in your prepared remarks.
Yeah, Hey, Ron It's James I mean, I think that.
Sure.
If we talk about in terms of lease yields were looking for I think thats definitely crept up a little bit I think we are.
Testing trying to.
But the money to work at 10 or high nines for skilled nursing maybe.
Maybe mid to low nines in seniors housing and working hard to find opportunities where networks. It's just really dependent state by state right now.
When you look at which states have.
Been favorable with respect to the Medicaid rate and which states has access to labor and which don't.
Drive what our basis is going to be and whether or not we can get.
That yielded a 10 or high nine skilled nursing.
And then just a question for bill any thoughts on.
On the balance sheet on terming out some of the floating rate debt.
As we think about modeling out 2023.
Yes, I would expect.
As a percent of total debt variable rate debt will increase.
Over the course of the year as we utilize the revolver to.
Match fund deals as well as but also keeping in mind, we will likely use the ATM to.
To fund those investments.
And then just last one if you could indulge me.
Any update in terms of your conviction or maybe lack thereof for kind of the three top 10 tenants that have kind of meaningfully below one times coverage and coveted asset impairment.
Yes.
About them in my remarks, we are confident that.
They are.
Okay.
Their hard work will pay off in a matter of time.
And.
We've got good corporate credit behind them beyond the.
Buildings that they have with us.
And so.
Not much to share beyond that.
I guess the one.
One thing I would highlight is with Bayer Shire.
Their lease coverage all of last year was north of one times.
And so because of the way we report it youre not seeing there theyre real performance.
Reflecting in those numbers yet.
So we'll see that continue to creep up and get out of the sub one times category soon.
Okay.
Thank you.
You bet.
Our final question comes from Austin, <unk> with Keybanc capital markets.
Yes, thanks for taking the follow up.
As might have been implicitly answered. This on <unk> question about initial yields on future transactions, but I guess as you look at those future deals and think about sort of the recovery and operations and some of the.
Various segments, how are you thinking about setting initial rent.
The participation in upside is as fundamentals recover.
I think we've really.
Yeah.
Gandhi offering upside in participation I think that we work really close with the <unk>.
Tenants were looking to put in on some of these value add if you will transactions.
Worked really closely side by side to try and.
Come up with the best we can in terms of underwriting.
Run rate for labor.
And what the occupancy can do so.
Those are difficult difficult assumptions to make right now and I think the closer we work with the incoming operator.
A look at historic where we have assets in the area of what they've been doing on their turnaround with respect to labor and occupancy and trying to mimic.
That with the deals we're looking at I think we just try to get to the best assumptions, we can with the tenant who has the more local knowledge and localized expertise.
To come up with a stabilized rent structure.
And if.
If a ramp as needed.
Then we definitely are open to looking at that.
And look at other creative ways to help them get to the point, where we feel like the facilities will be stabilized.
Great. Thanks for taking the question.
You bet.
There are no further questions at this time with that said concludes today's conference. Thank you for attending today's presentation. You may now disconnect.
Okay.
Okay.
Okay.
Yes.