Q1 2023 CareTrust REIT Inc Earnings Call
Speaker 1: that was previously counted as held for sale for approximately 3 million.
Speaker 1: Finally, on the regulatory front, our operators have been preparing for the end of the public health emergency, which expires today, potentially impacting some operators while being essentially a non-event for others. Additionally, the public health emergency has implications for the Medicaid rate as the 6.25% add-on from CMS winds down by the end of the year. We are, for the most part, encouraged by the steps many states have taken to permanently address the increased cost of care for operators due to the pandemic and the subsequent high inflation. My last issue for the regulatory environment relates to the proposed minimum staffing requirement from the board of directors.
Speaker 1: taking is evidence of them weighing seriously the realities on the ground that are being shared with them.
Speaker 1: So, heading into June , we're really pleased with the progress made to date toward our main priorities for the year.
Speaker 1: namely returning to asset acquisitions, sourcing more off-market deals, expanding our operator bench, increasing the dividend, and further de-risking the portfolio through active asset management work, all while maintaining a leverage profile that provides tremendous flexibility in a challenging market.
Speaker 1: With that, James will talk to you about our recent activity and pipeline.
Speaker 2: Thanks, Dave, and good morning, everyone. As Dave mentioned, this year we're off to an exciting start with approximately $47 million in new acquisitions consisting of three transactions, five facilities, and three new operator relationships.
Speaker 2: At the end of Q1, we closed on a 280 bed, two facilities field nursing portfolio in Texas and Kansas. We closed on a 280 bed, two facilities field nursing portfolio in Texas and Kansas.
Speaker 2: We paid approximately $17 million for the portfolio, with the Texas facility being a tack-on to our existing master lease with momentum-skilled services, and the Kansas facility being leased to Summit Healthcare Management, a new operator for us.
Speaker 2: Combined, stabilized annual rent for these facilities is approximately $1.69 million.
Speaker 2: Next, earlier this month we closed two transactions with each starting a new operator relationship.
Speaker 2: First, we acquired a 148-bed skilled nursing facility in the Atlanta metro area for approximately $12 million and leased the same to the Elevation Group, an operator founded by Brothers Ken and Dan Funk, two industry veterans with many years of combined experience operating skilled nursing facilities. The Telepis Institute provides Mission Telemek.
Speaker 2: The annual rent for this property is approximately $1.14 million.
Speaker 2: We followed the Atlanta closing by acquiring a 136 unit two facility memory care portfolio in the Chicago area for approximately $18 million.
Speaker 2: We lease these buildings to Chapters Living, a Midwest-based memory care operator in its early growth stage and co-founded by Danny Stricker, an experienced leader in the seniors housing industry. The initial annual stabilized rent for Chapters is $1.7 million.
Speaker 2: These transactions reflect what is one of our top priorities this year, a return to acquisitions.
Speaker 2: Given the current lending environment, we continue to opportunistically pursue actionable deals where we feel our access to capital, low execution risk, and reputation as a quality transactions partner make us a particularly attractive buyer. A sustained return to acquisitions requires that we not only deepen and expand the
Speaker 2: our relationships with the best-in-class operators that make up our operator bench, but it also requires a commitment of resources and effort to actively seek out prospective operators that we can confidently grow with in the future. Last year, we allocated some internal resources to enhance our focus on expanding our network of prospective tenants.
Speaker 2: We are seeing that commitment of resources paying off with the addition of these three new operators this year.
Speaker 2: As you may recall, last year we also strategically provided some debt financing.
Speaker 2: in part as a means of establishing relationships with operators we had admired from a distance.
Speaker 2: Our purposeful, relationship-based lending program in large part yielded the opportunity to acquire the Georgia facility by utilizing the connection we made as part of one of the loans we extended last year.
Speaker 2: We are gratified to see last year's move to strategic lending activities already begin to bear fruit in our current pipeline of acquisition opportunities.
Speaker 2: As Dave referenced in his comments, deal flow remains strong.
Speaker 2: Most incoming transactions consist of between one and four facilities, with only a small number of larger portfolios hitting the market. We are seeing sellers continuing to divest non-strategic assets.
Speaker 2: We also continue to see a number of inbound transactions with facilities that are in some stage of operational distress.
Speaker 2: Unable to make debt service under variable rate loan obligations or facing maturity date risk.
Speaker 2: We see some motivated sellers adjusting pricing expectations as more highly leveraged buyers remain somewhat on the sidelines given the banks continue tightening on lending activities.
Speaker 2: We remain optimistic that we can continue to source accretive transactions over the coming quarters.
Speaker 2: And with that, I'll turn it over to Bill.
Speaker 3: Thanks, James.
Speaker 4: For the quarter, normalized FFO decreased 2.4% over the prior year quarter to $35 million. Multi-constructed FAD decreased by 3.5% to $36.6 million.
Speaker 4: On a per share basis, normalized FFO decreased 2 cents to 35 cents per share and normalized FAD also decreased 2 cents to 37 cents per share.
Speaker 4: Rental income for the quarter was $46.2 million compared to $47.7 million in Q4.
Speaker 4: The decrease of 1.5 million is due largely to the following four items. The first two of these items were discussed on last quarter's call.
Speaker 4: First, we received approximately $1.2 million less of cash rents from tenants who are on a cash basis.
Speaker 4: 700,000 of which related to exhausting the security deposit of the negative coverage tenant in Q4.
Speaker 4: Second, we received approximately $1.1 million less cash related to a prior tenant in Q1 than in Q4.
Speaker 4: This $2.3 million decrease was offset by
Speaker 4: Third, an increase in rents from CPI bumps of $319,000. And fourth, a write-off of a straight-line rent receivable of $440,000 in Q4, but none in Q1.
Speaker 4: Interest income was up $308,000 mainly due to a fee paid on a $15 million note that was paid off at the end of Q1. As a result of the payoff, I would expect interest income to be more like the Q4 number, less $500,000, which was the quarterly interest on the $15 million note.
Speaker 4: Interest expense was up $219,000 from Q4 due to higher interest rates offset by lower borrowings under the revolver.
Speaker 4: Subsequent to quarter end, we drew thirty million on the revolver for acquisitions.
Speaker 4: G&A expense increased $248,000 from Q4 due to higher short-term incentive compensation offset by lower stock compensation and other corporate related items.
Speaker 4: The big decrease in stock compensation is due to stock forfeitures that occurred when Mark Lamb left the company.
Speaker 4: I would expect stock compensation to return to a quarterly run rate of around 1.5 million.
Speaker 4: Even with that increase, G&A expense for the year will be around 21 million.
Speaker 4: Cash collections for the quarter came in at 96.3% of contractual rent and in April we collected 97.5%. We didn't issue any shares under our ATM program this quarter.
Speaker 4: But after quarter end, we entered into a forward sale and have today issued approximately 1.8 million shares and an average gross price of 1991 before we entered the blackout period.
Speaker 4: As a result, our liquidity remains extremely strong with approximately $25 million in cash and $435 million available under the revolver.
Speaker 4: Leverage also continued to be strong with a net debt to normalized EBITDA ratio of 3.8 times, which is below our stated range of 4 to 5 times.
Speaker 4: Our net debt to enterprise value was 26% as a quarter end, and we achieved a fixed charge coverage ratio of five times.
Lastly, we had hoped by this time we would have reinstated guidance as we have done in past years. We expect to begin issuing guidance once we have made sufficient progress with the previously discussed portfolio repositioning work. With that, I will turn it back to Dave.
Thanks, Bill. We hope our report's been helpful, and thanks for your continued interest and support, and we'd be happy to take your questions now.
Thank you. As a reminder, if you would like to ask a question, press star followed by the number one on your telephone keypad.
Your first question comes from the line of Stephen Valaket with Barclays. Your line is open.
Your first question comes from the line of Steven Valaket with Barclays. Your line is open. Thanks everyone. Thanks for taking the question.
Just a question here, maybe just kind of looking at page 11 in the slide that just kind of the geographic diversification. And obviously with just so much of the portfolio concentrated in Texas and California, just curious if you have any just updated thoughts on the, you know, the state Medicaid rate updates in those two states in particular, just given how critical they are to the overall geographic footprint of the property portfolio.
If any other states just stick out one way the other curious any other thoughts other state that you think are critical as well as far as just the overall Medicaid rate outlook and updates that are happening this year. Thanks.
Yeah, thanks to California seems pretty settled in terms of the operators there and their outlook. They feel like.
The certainty that they have the visibility that they have to the path for the Medicaid rate increases there are good we feel comfortable with California with Texas that literally is since the legislation legislature there is currently in session today by day couple times a day.
conversation with with some of our operators that are there. Texas, we love the state. They're long overdue for a rate increase.
There's probably more optimism about an increase passing than we've seen in a long time.
But we should know in the next couple of weeks how that's going to pan out Regardless both California and Texas represent not just states that we like but states with
some of our very best operators who have strong coverage and
and great teams. So we're not really sweating the news coming out of those two states.
So we're not really sweating the news coming out of those two states. OK.
All right, any other states worth calling out just besides those kind of big two or is everything else just kind of?
status quo or not material in one way the other from your perspective? Yeah, most of the other states.
Have already passed some sort of F map adjustment and we were again we're not we're not concerned about the.
The other states and what they're doing on the Medicaid front we wish that some would have done more and some would have moved earlier but
Nothing probably worth noting on this call. Okay. All right. I appreciate it. Thanks. Thanks, Steve.
Your next question comes from the line of Jonathan Hughes with Raymond James.
Your next question comes from the line of Jonathan Hughes with Raymond James. Your line is open.
I look forward to the next quarter when we can have more guidance, clarity. So I won't ask about that now since you already talked about it. But I do want to ask about EBITDA coverage, ex-HHS funds outside the top ten tenants. I saw that's –
dropped by about 20 basis points or so from last quarter. Was that because of the?
you know, 3% operator that went further into negative coverage territory, or was it deterioration from other operators? Just trying to get that breakdown since you had quoted that number last quarter.
Yeah, Jonathan, primarily it's primarily that negative EBITDA coverage operator. If you strip that one operator out.
then that line item goes from 0.88 times to 1.73 times.
Thank you.
And then turning to acquisitions, the recent yields on some of the investments completed this current quarter we're entering that mid to high nines.
That included a few assisted living facilities, which is higher than I would have expected for seniors housing. Are you seeing yields on assisted living facilities approach those of skilled nursing within your investment pipeline or was that a bit of a unique situation?
I think as a general matter, Donathan, I would say yields on seniors is creeping up a little bit, but still mid to high fives for the most part, mid to high eights for the most part. I would say that the yields on the investments we've done this year so far in seniors.
are more a factor of where we feel like we've been able to get a really attractive basis based on the circumstances behind why the sellers want to get out.
allowed us to go a little higher on the yield by underwriting with the tenants because there's going to be room there based on the lower basis.
And are those three new relationships year-to-date, are they subject to exclusivity agreements, meaning if they have potential expansion plans in the future that you would have the right to take a first look at financing any of that growth?
A couple of them do, but it's somewhat soft. Jonathan, it's kind of maybe a ROFO if they're looking to finance or do a REIT.
kind of deal that they'll kind of approach us first. It's a little bit soft, but that's kind of what we get from them. That if they're going to go do re-deals, they bring them to us first to look at with them to see if we can come together.
Got it. Okay, and then one more for me.
I saw a few assisted living facilities were transitioned to penance.
Will those be added to the tenant guarantee by enzyme or are those separate from that?
Those are separate from that guarantee. Okay.
from that guarantee. Okay. All right, that's it for me. Thanks for the time.
Thanks, Jonathan.
Your next question comes from the line of Austin Werschmit with KeyBank.
in the line of Austin Werschmidt with KeyBank. Your line is open.
Great, and good morning out there. With respect to the non-top 10 tenant update, is the partial rent payment a reflection at all of a gradually improving situation, just like we've heard more broadly around labor occupancy and with the Medicaid rate increase?
that are coming in July , could operations improve to a level where you could reach a resolution that might result in a rent cut and maybe a lease extension? Or do you think that moving away and moving on from this asset is a more likely outcome? I'm just trying to get curious where your thought process is right now.
I think at this stage in the discussions, it's just too, it's too early to speculate. Like I said.
either in my remarks or in the press release, all options are really on the table right now. They really did just last week solve for the CEO that they had terminated right before last quarter's call.
And they've been taking some time to figure out their priorities and where they want to take things.
Could we end up selling this portfolio this year? We certainly could, but.
Could we end up selling this portfolio this year? We certainly could, but you know.
A lot of discussion still has to take place with these guys to figure out what they want to do and what's the best path forward for both parties.
Understood. Has anything changed with respect to these locations and quality of the athletes versus when you initially underwrote them? And I think you partially answered this, but would you expect a resolution one way or another before the end of the year?
Well, certainly the financial situation has deteriorated significantly compared to when we originally underwrote them. Occupancy took a big hit during the pandemic.
going into COVID, they were performing pretty well.
And they just…
This is probably the portfolio that got hit hardest
and performed the poorest in our portfolio because of COVID.
They have been having a hard time recovering.
My, my hope and expectation is that we'll have.
something resolved before year-end.
And then Dave, with respect to the minimum staffing requirements you spoke about, which kind of remains in process, but based on what you know now, what percent of your tenant base would you consider being kind of at risk of a potential mandate? And are you looking more closely at staffing in your underwriting of new deals?
I hate to say it, but it's really impossible to comment on that because we don't know.
What what the form final form is gonna be on the regulation we don't know, for example, what staff is going to be included. Will administrative staff be included or not will non nursing staff be included somehow there's just too many variables there to.
to comment on it.
comment on it.
So, we'll just have to wait and see how it finally comes out. That's fair. Thanks for the time.
and see how it finally comes out. That's fair. Thanks for the time. All right, Austin. Thanks.
Your next question comes from the line of Michael Carroll with RBC Capital Markets. Your line is open.
Yep, thanks. Dave, I wanted to stick on this 2.8% tenet. I know last quarter that you're highlighting that the situation could be resolved or at least you have some type of plan by the time you report it today. Is there something going on? I guess what's how that situation evolving.
has taken them I think longer than they expected and that we expected for them to replace their CEO which just happened last week.
expected and that we expected for them to replace their CEO , which just happened last week.
And you know the direction that they want to take the company has been
kind of in process and evolving from week to week depending on who they're interviewing and what things that they're pursuing. So...
in process and evolving from week to week, depending on who they're interviewing and what things that they're pursuing.
Yeah, not terribly surprised, but.
continue to be hopeful that we'll find resolution here quickly. The tone of the conversations with these guys is very friendly and productive and so we we're making progress. Okay and is it is it fair to read through it that they want to keep these assets given they hired a new CEO to...
working on stabilizing the assets.
Are they making progress on stabilizing the assets? I know it's hard to look at just the coverage ratios, but it sounds like coverage ratios dropped pretty meaningfully. Are they making progress since those were reported?
You know, the kind of progress that we would – that show up in the financials, we haven't seen it yet.
Okay. And then just last one for me, can you talk a little bit about the types of investments that you're tracking? I mean, are these mostly stabilized deals or are they really transitions and needing new operators to drive better results? And I guess why I kind of say that is it looks like the Summit and the chapters deals just provided rent abatement.
Who needed a little room to start to get through the lag between, you know.
providing the service and billing and getting the reimbursement. And the other one was very much a
They're working on a turn. They needed a little bit of room to get that turn underway and going.
before paying full freight on the rent. But they're both very short of payments. Yeah, is that similar to what's in your pipeline right now, too?
Some of that in there, yeah, but there's also a mix of other stuff that's cash flowing and that, you know, where a rent ramp really isn't going to be needed. But there are some where, you know, you have.
some sellers selling kind of these
non-strategic assets and maybe have a half ton of attention paid to them for a little while. So, there's easy levers. We talked with the operators about polling, but it may take a few months to get there. But there's also definitely cash flowing assets in the pipeline that we're looking at that we would underwrite and kind of look to execute on based on our historic yields.
Great, great. Thank you. As Mike. As a reminder, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your next question comes from the line of Teo Akasana with Credit Suisse. Your line is open.
Yes, good morning out there. I just wanted to follow up along Jonathan's question about, you know, he asked about the non-Top 10, but I wanted to ask about the Top 10 tenants. There's still a couple of them at this point where the rent coverage is not even close to one. It's meaningfully below one.
you know, 0.4, 0.5, 0.6. How do we think about recovery for these type of tenants where then the coverage is significantly below one, even if they're current on rent payments? Well, the way we think about these operators and are not, I'm sorry, in our top 10.
Specifically, they have something in common, which is they have a really good corporate credit.
behind them and they have other properties outside of our relationship that are performing much better than ours.
And so we really view it as a matter of time for them to get things back north of one team's coverage. A tricky thing for one of these guys, Aspen, is it represents just two facilities. So when you have a situation like that, if just one building is not
You know, hitting on all cylinders it can throw the whole thing kind of sideways from a coverage perspective.
But they're a large a large regional player with a great credit. So We're not We don't think rent will be an issue with any of those guys
Okay, and then any along those same lines of thematically anything specific about why your assets and their portfolios seem to be struggling but the other assets seem to be doing well and that's what's helping with the corporate guarantee. What's uniquely happening at this point?
your assets. I don't know whether it's something thematic, whether it's a case-by-case basis.
Yeah I would say it's a you really have to look at it building by building some of the buildings that they are running for us are doing really well and others are not and so
This business is hyper local and the way these operators run their business is very
Local as well and so getting those right local leaders in place tends to be the primary lever that is needed so that the subsequent levers can get pulled in place.
That's helpful. Thank you. All right, thank you.
There are no further questions at this time. I turn the call back over to Dave Frederick for closing remarks.
Well, I really appreciate everybody's time and continued interest.
If there's anything else, please give us a call. Otherwise we'll see many of you in New York at neighbor in June . Have a great day.
This concludes today's conference call. Thank you for attending. You may now disconnect.