Q3 2023 CareTrust REIT Inc Earnings Call
Good day, everyone and welcome to the care Trust REIT announces third quarter 2023 operating results today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad.
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I would now like to turn the call over to Lauren Beale Senior Vice President and controller. Please go ahead.
Thank you and welcome to care Trust REIT third quarter 2023 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 characterize business and the environment in which it operates these statements.
Since may include projections regarding future financial performance dividends acquisitions investments return financings and other matters and may or may not reference other matters affecting the company's business or the business isn't it.
Including factors that are beyond their control such as natural disasters pandemics, such as COVID-19, and governmental actions.
Company's 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 here at.
Listeners should not place undue reliance on forward looking statements and are encouraged to review characterize 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 care Trust REIT and its affiliates do not undertake to publicly update or revise 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 the company will reference non-GAAP metrics, such as EBITDA S. S. O S. A D or fad and normalized EBITDA <unk> and L. P D.
When viewed together with GAAP results. The company believes these measures can provide a more complete understanding of its business.
But they should not be relied upon to the exclusion of GAAP reports.
In addition, certain operator coverage and financial information that we just got it based on data provided by our operators that has not been independently verified by characterize.
Yesterday characterize filed its Form 10-Q, 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 dotcom.
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 Jim Costa Chief Investment Officer.
I'll now turn the call over to Dave Sedgwick characterize president and CEO David.
Good morning, everyone and thank you for joining us as we round third base on this year. We are pleased to report progress on several fronts.
Not only have we made a significant return to external growth by investing $280 million year to date.
But also we have set the table for 2024, and 25 with an active pipeline and a ton of dry powder.
We have financed that $280 million of investments by selling $420 million worth of equity off our ATM.
The excess proceeds were used to completely pay down $600 million line of credit.
Resulting in a net debt to EBITDA of two five times at quarter end.
We are willing to take some modest dilution in the short run to be positioned to take full advantage of the favorable investment environment. We are in today and expect to be in for the foreseeable future.
I will touch on our investment activity in the quarter and how we are thinking about next year I'll also touch on the portfolio and the regulatory environment from James and Bill we will take it from there.
First investments.
After a significant return to external growth in Q2. The team has continued to drive forward with its foot on the gas.
Since Q2, we have invested another $79 million with a blended estimated stabilized yield of 10, 2%.
Investment activities. Since Q2 consists of two loans for just over $19 million at a blended rate of nine 6%.
The loans, we make are done strategically to borrowers and operators, who we believe will lead us to true acquisition opportunities in the future.
That was certainly the case again with these two loans.
Investments since Q2 also included two acquisitions, consisting of three skilled nursing facilities in California.
We added one skilled nursing facility at a yield of nine 7%.
The second deal was for two high performing skilled nursing facilities with a lease in place operated by Kevin and care.
You'll notice in the supplemental that with this acquisition covenant cares property level EBIT Dar coverage Pops to 143 times.
The leases in place initially yield just under 6%.
But in 2027, the leases provide for rent reset.
Assuming current performance is maintained our yield at the time of the reset is projected to be just under 11%.
Now turning to the portfolio you.
You will see in the supplemental lease coverage slightly improved overall, let me chat about a couple of individual operators.
Notably and as I mentioned, a second ago Covenant care EBITDAR coverage has popped up to 143 times with the acquisition of two facilities with a very well covering lease in place.
Additionally, the same store covenant care properties continued its trailing 12 month coverage improvement for the third quarter in a row.
<unk> lease coverage has been on a downward trend. The last couple of quarters. We are working with them on a solution for a couple of their noncore facilities that we agree it should be in different hands.
We have a great relationship with the Bureau, and are working closely with them to minimize any material impact to Rev.
Lastly, as of a few minutes ago, we are under contract to sell the 11 skilled nursing facilities in the Midwest that we classified as held for sale last quarter.
We hope to close on that sale before our next earnings call.
Finally on the regulatory front, one quick comment.
We add our voice to the thousands of others in our industry that have called for significant changes to the proposed minimum staffing mandate from the federal government.
The proposed rule requires 24 hour RN coverage at <unk> 55 are in hours per patient day, and 245 hours per patient day.
For certified Nurse's aides with no mention of LPN ours, nor adjustment for acuity.
Even with the delayed and staged implementation schedule as the industry is unified in its efforts to work with CMS to modify the proposed rule.
To be in a forum that the industry can work with.
We're hopeful that CMS will pay attention to the feedback they've solicited and modify the rule.
No James will give you more color on the pipeline, but I will just say this the investment landscape is very favorable for us as we head into 2024 as I as I said before the table is set for the next couple of years, we have.
Favorable cost of capital that allows for accretive investments we.
We have a balance sheet that provides enormous flexibility.
We can do roughly $500 million of investments and still end up below our stated range of four to five times debt to EBITDA.
And we have a macro environment that is sidelined some of our historic high leveraged competitors.
And we do not expect the banks to come Roaring back with cheap debt anytime soon so with that James will talk to our recent activity and pipeline James.
Thanks, Dave.
Let me just briefly provide an update on the current investment environment and add some color on our current pipeline.
With respect to seniors housing most of the proposed transactions that we see continue involve facilities that are in some stage of operational distress typically due to maturity de risk our variable interest rate loans, including risks related to the expiration of interest rate cap agreement as a result, the bid ask gap in seniors housing remains wide.
We nevertheless continue to look for attractive seniors housing deals, we're a triple net lease structure might given current rates in the constrained lending market be an attractive alternative to traditional debt financing for those operators, who are looking to grow and add scale their operations.
We continue to see robust deal flow and skilled nursing transactions pricing that is based on stabilized cash flows and coverage is still very rare.
That said, we're also seeing a decrease in the last couple of years and transactions involving portfolios that are experiencing negative cash flows and heavy losses a.
A combination of factors, including Medicaid rate increases healthier labor markets census, recovery and lower agency staffing levels and facilitated some measure of recovery in many portfolios.
As a result, most skilled nursing assets being marketed currently reflect recent performance landing at breakeven or better, but still a fair distance from stabilization.
As facilities show immediate improvement in performance sellers, bringing buildings to market range from institutional owners of REIT, continuing to dispose of non core or non strategic assets in regional owner operators or mom and pops sewer fatigue, and theyre looking to capitalize on a return to positive cash flow by selling and exiting the space.
Seller pricing expectations, and correspondingly brokers guidance appear to be gradually softening to take into account performance results.
All short of stabilization, but the pace of price softening is still lower than anticipated.
We expect to see a continued narrowing of the bid ask in skilled nursing given continuing high interest rates lenders enhanced credit recourse requirements maturity date risk in a smaller buyer pool as purchase prices slowly continue to settle lease yields will also likely continue there are slight push up towards and in some cases beyond 10.
Percent with attractive basis levels, better able to support a higher yielding rent stream.
Given opportunistic opportunistic market dynamics, we continue to look for occasions, where our attractive cost of capital and our flexibility in sourcing and structuring transactions can be used to create additional acquisition and investment opportunities that are accretive to our operators. We will continue to execute on our acquisition strategy of disciplined growth with risks.
Adjusted returns consistent with healthcare Trust has been dealt over the past several years.
The pipeline today is around $175 million and mainly consists of singles and doubles. We are also continuing to review a few larger portfolio opportunities that would not only strengthening existing tenant relationships, but would also allow us to further diversify our tenant base by commencing relationships with outstanding operators.
Have been scouting for some time, please remember that when we quote our pipe we only quote deals that we are actively pursuing under our current underwriting standards.
And then only if we have a reasonable level of confidence that we can lock them up and close them in the relative near term and with that I'll turn it over to bill.
Thanks, James for the quarter normalized <unk> increased one 5% over the prior year quarter to $36 6 million and normalized <unk> increased by 2% to $38 $8 million.
On a per share basis normalized <unk> decreased two to <unk> 35 per share and normalized <unk> decreased.
To <unk> 37 per share.
Rental income for the quarter was $51 2 million compared to $47 7 million in Q2.
The increase of $3 5 million is due largely to the following items.
First we received approximately $2 5 million from new investments.
We received approximately 402000 CPI bumps.
Third tenant reimbursements, which are non income and <unk> producing because they have a corresponding expense increased 775000 to.
To $2 million.
Lastly, these positive items were offset by 272000, which is mostly from properties that we have sold.
If you exclude the tenant reimbursements amount of $2 million contractual cash rental revenue was $49 2 million for the quarter.
Interest income was up 851000, due to new loans of $1 million slightly offset by a 191000 of lower money market interest.
The quarterly interest income run rate on our notes portfolio was approximately $4 5 million.
Interest expense was up 710000 from Q2 due to higher average borrowings during the quarter and higher rates.
G&A expense increased 801000 from Q2.
Due to stock compensation returned to the quarterly run rate of roughly $1 6 million as I previously discussed on last quarter's call.
I expect the G&A expense for the year will be around $21 4 million.
Cash collections for the quarter came in at 97, 5% of contractual rent and in October we collected 99, 3%.
Under our ATM program through today, we have sold approximately $18 2 million shares at an average gross price of $19 90 for gross proceeds of approximately $362 million.
We have approximately $660 million still outstanding on forward contracts that we have not settled.
As a result, our liquidity remains extremely strong with approximately $36 million in cash on hand, our entire $600 million available under our revolver and the $60 million of future ATM proceeds.
I expect we will settle these remaining contracts before year end, depending on the timing of closing future investments.
Leverage hit an all time low with a net debt to normalized EBITDA ratio of two five times, which is well below our stated range of four to five times, our net debt to enterprise value was 16, 8% as of quarter end and we achieved a fixed charge coverage ratio of four five times.
I wouldn't be surprised to see leverage check further downward as we continue to fund our pipeline with equity given where the total cost of debt is at today relative to our cost of equity and with that I'll turn it back to Dave great well.
Hope our reports been helpful and happy now to take your questions.
Thank you Andy I'd like to ask a question on the phone lines today. Please press star one on your telephone keypad and as a reminder, that is star one to withdraw your question as well.
We'll take our first question from Conor Seversky with Wells Fargo.
Hi, there thanks for thanks for the time.
Question on the competitive environment for skilled nursing and senior housing assets.
As of last week, one of the other players in the group expressed an interest in skilled nursing in particular, so I'm wondering with this kind of new entrant in this space, we're not a new entrant, but with this increased interest in this space does this affect the way you are looking at pricing, whether or not you are willing to move up the risk curve and maybe take on a relatively distressed.
Relatively distressed operator in order to get yields I'm, just curious how youre thinking about these dynamics.
Okay.
Yes.
This is James there is.
Smaller buyer pool.
I'd say.
We're talking about well tower entering the space a little bit more I'm not sure. We compete for many of the same deals, but I don't I think we look at each deal on its own and we look at the basis that can support and the operators that can get comfortable with the rent and if we get an actionable deal it falls within.
And of that criteria of what we're looking for.
We really get.
Get as aggressive as we can to tie it up and to get the deal done and to work with an operator to help us give the most aggressive or most.
It's been we can and still feel good about the deal.
So I think there's definitely a little bit of increase in competition, even though it's a small smaller buyer pool.
But I wouldn't say it impacts.
How we view what pricing.
We feel we can be competitive that and have a successful.
Ron with that asset.
Okay, and then when we take 2024 into consideration should we be expecting.
Maybe two three asset deals or are there some portfolios out there that can make a big dent at one time.
Well historically, when we've had kind of our larger investment years, there's always been kind of a chunkier deal in there.
And so we're always reviewing those those are smaller lower probability of getting that done but.
There is certainly out there.
And we expect those to continue to cross our desk into next year.
But right now the.
Visibility that we have the confidence that we have are more of the singles and doubles.
That youre used to seeing us put together.
Okay, and then very quickly for bill.
Great job on the balance sheet looks like this next slug of activity is pretty much pre funded but you still have the cost of equity there is still some ATM capacity out there should we just assume that any acquisitions for the next year goes straight onto the revolver or can we still see some.
Equity issuance to balance it out.
I think you can assume as I said in my prepared remarks that we would continue to fund investments with equity given where the cost of debt is relative to our cost of equity right now.
Okay. Thanks for the time.
Please go ahead.
We will take our next question from Austin, <unk> with Keybanc capital markets.
Great Good morning out there.
You guys had mentioned that you really highlight and focus on deals that you have a reasonable confidence you can close so I guess I'm just curious what kind of probability is that you are able to get one of these across the finish line and then can you also discuss about the yields on portfolio transactions relative to the singles and double.
And that $175 million pipeline you discussed.
Yeah, I'll start and then James can clean up after me.
High level.
When we talk about our our pie if we really want to.
Yes.
Different people talk about their pipes in different ways.
We certainly don't talk about everything that is on our screen that were taking a look at we really narrow it down to things that.
Our.
At either at least under LOI or very close to it.
We have a lot of confidence that we can close.
The timing on closing our pipe when we announce it generally is anywhere from.
<unk>.
Imminently in a months to nine months.
Or longer depending on how it.
Particular transaction develops.
So.
That's how you should in terms of the timing of it if we say $175 million you should not expect that to happen.
Bye.
Year end and you should have kind of some grace period of one to nine months give or take and sometimes stuff falls out of that pipe that we announce.
But because of the activity that we're seeing right now.
We're pretty confident that if something does fall out of that.
We will be able to replace a pretty quickly.
James.
Yeah on your question about yields on portfolio transactions.
Amy.
The easier answer is it depends on the transaction, but I would say as a general concept with our experience with portfolio deals is that if we really like them and we have the right operator solution or solutions.
Then I think we probably would be willing to do a yield that.
Is maybe a couple of turns lower than what were what would usually be underwriting it add to try and be more competitive.
Sure.
But we're never going to go below what we feel like at the time is the right spread between our cost of capital and yield. So we will go a little bit lower to be aggressive and try to get the deal.
But typically not somewhere aware or even close to not really having a spread on that deal.
That's helpful. And then can you just discuss or confirm I guess the terms on the 11 property portfolio. You mentioned just went under contract.
And then did you collect any rent from those assets in the third quarter.
Well in terms of the terms of the deal.
Im going to demure on that just because.
Yes.
Even though we just put it under contract today, if it falls out of contract it wouldn't be wise to signal to the market. What we are willing to transact at at this point and in terms of rent, yes, we did receive rent in the quarter from that operator.
But not ahead of it and then just less.
Okay. That's fair and then just the last one for me on the Covenant care deal did you consider putting those into a single master lease with the existing assets that you owned.
I guess, how did you just get comfortable.
With the operator, given you were below one times coverage I know you've talked about them quite a bit in the past, but just curious about the latest thoughts on this new deal and how you thought about structure.
Yes, great question.
Whats encouraged us about.
The rationale for that really comes to a few different points one is.
Like I said in my prepared remarks Covenant care same store outside of these two we have seen three quarters in a row of improving trailing 12 EBIT dark coverage.
Getting closer and closer to covering just at the property level EBITDAR.
So that's encouraging.
The second point is.
Because.
These reset in a few years is January 2027 is the reset.
We think that that does a couple of things for us It continues to provide them with some time.
To continue to improve our.
Same store assets with them.
And.
<unk> strengthens our relationship with them as well.
If there's like a downside scenario, we've always talked about how attractive the.
Covenant care facilities are and how much interest we regularly receive.
Unsolicited.
Interest from.
Operators to take on those assets.
So having these two included in our in our.
Real estate owned.
Properties really improves our position with them in a in a downside scenario.
We're not expecting that but it certainly helps but when you have the lease rate being reset.
Shortly.
Through all of that together and we feel like it was a is a no brainer, we're excited about that acquisition.
That's great. Thanks for the time you.
You bet. Thank you.
We will take our next question from Michael Carroll with RBC capital markets.
Yes. Thanks.
James in your prepared remarks, you kind of discuss that pricing is starting to come down.
So, what's driving that or buyers pushing and sellers willing to accept higher yields or are these stakeholders, just being more conservative underwriting, where EBITDAR is trending or where it could potentially stabilize.
Okay.
Yeah, Mike I think that it's a combination of factors I guess I'd say I think that.
You see.
A number of.
We're more than using institutional groups now that they've got positive cash flow in buildings.
And to take advantage of being there and exiting putting those up for.
Our sale and if they've got any kind of interest rate risk score maturity date risks. They are just a little more wanting to be a little more reasonable to get the deal done quicker.
Think also and he really wanted to attract the all cash or quick buyer.
Willing to get a little more you kind of they take a little less on the proceeds side to get more certainty of execution and timing.
And so I think that's why they've come down a little bit I think also just.
If you put a deal out there right now it has stabilized number it's not.
You're just not going to get the interest youre not going to get the buyer of a quality that you want to be able to close quickly and I think thats feels like it's finally, starting to really be taken into account.
Narrowing the bid ask gap a little bit.
To kind of.
Ensure that certainty of closing with a quality buyer.
Okay, and then can you provide some color on who are the sellers.
Maybe you could talk about it generally or even kind of discussing related to this covenant care deal I guess why do they want to sell is there was there a certain reason for in this situation why the seller wanted to get out.
And the two covenant care deals, it's third party family kind of own family Office third party landlord.
They were not.
Particularly heavy investors in skilled nursing assistants and assets in held for a very long time and they felt like.
It was the right time to get a price that they could sell out so I can't speak entirely for them, but I think that's pretty consistent right now whether it's.
Institutional or mom and pops or whoever that.
Either a fatigue for what it's been like a few years of really are facing down the barrel of having to try to refinance.
Or figure out their maturity date risks.
And so they are putting up.
Properties for sale and you still see some institutional and REIT selling non core assets because the buyer pool is more.
A little more that you get that certainty that hey, if I put it up now and getting a cash buyer and so they are trying to take advantage of that now the cash flow is positive for the most part.
Okay, and then with regards to the expected our duro transition can you quantify the type of rent disruption, we should expect on that.
No not at this point.
We're still.
Working through a couple of different scenarios with them, but like I said.
As we sit here today, we don't think that it's going to be anything material to us.
Okay, great. Thank you.
All right.
As a reminder, everyone that is star one to ask a question we will take our next question from Juan Sanabria with BMO capital markets.
Hi, Good morning, just hoping you could comment on your thoughts on the California, healthcare and minimum wages and you guys. Obviously have a big exposure. There. If you could maybe give us a sense of where that exposure lies in or you have a big exposure to ensign, obviously, who is big in the state.
If you could just bifurcate, where your assets in California, who those operators are broadly as well. Thank you.
Yes, Hello, and thank you for that.
We've got.
I'd say, probably our strongest group of operators in our entire portfolio are in California.
And.
We are really not.
Overly concerned with the mandate there.
As you May know the skilled nursing sector was.
Excluded from the mandate.
Generally speaking.
And yet there will be some upward pressure just from competition from other health care settings.
The reason, we're not terribly concerned about it is because it has quite a long.
Implementation schedule ahead, several years of getting to that number.
And in the meantime, we're and that's going to that's going to correspond with several years of continued recovery.
From the occupancy perspective, we think continued recovery on the agency.
Staffing.
Perspective.
And we've got increased Medicaid and Medicare rates that I think we would expect also over the course of the next five years.
That you throw all of that together.
And we think it'll be depth.
Definitely manageable by <unk>.
Particularly our strong core of operators in California.
And then just curious if you have any sense of what the.
The level of.
Agency or a lack of staffing.
It is in the portfolio today and.
Any way to quantify how much.
Thats holding back a further improvement in occupancy at this point.
Yes, the last part of that question, a real challenge to figure out.
<unk>.
Anecdotally, we know that there are still constraints for some of our operators to admit because of staffing constraints.
As far as the agency.
That actually as you look at it.
Provides another.
Bit of a tailwind for our operators in terms of.
Their coverage because.
We're still quite a ways off of our pre pandemic H.
See you.
Usage portfolio wide.
Before the pandemic, we were at about a Buck 50.
On a per patient day basis for agency usage in the portfolio.
And we still are a few dollars north of that so we have a ways to come down.
And we've steadily seen that improve from last quarter to this quarter, our agency and our portfolio decreased by about eight 5%.
And.
We were encouraged to see that in.
We believe it's part of the reason why.
We should expect occupancy and overall recovery to continue.
The 5% was a year over year or sequential decline.
Sequential decline from last quarter to from Q2 to Q3.
And then just a follow up fee for rents.
Our booked in the third quarter four.
The <unk> portfolio was that just to think from a modeling perspective, how much renter NOI goes away.
There.
Third annual rent is.
Their monthly rent is around $400.
And all of that was captured in the third quarter.
Makeup.
They did not pay 100% of contractual cash rent in Q3, they make up.
A small portion of the.
Of the two 5% that we did not collect.
Okay.
Hey, Juan let me, let me, let me make a quick correction.
The improvement in agency that I cited of eight 5% was actually from Q1 to Q2.
We're a little bit too early to talk.
Talked about Q3.
Got it.
Alright.
We will take our next question from Alex <unk> with Baird.
Hello. Thank you for taking my question today first one is on the types of the initial yields that care Trust is seeing in the pipeline right now and the expected stabilization rate.
Yes, Whats your question.
Just what are what are those yields.
Okay.
On the pipeline right now.
So yes.
The very deal by deal in some cases they will be.
It depends on whether or not we provide any sort of ramp in rent.
In some cases like James talked about a lot of what we are underwriting and bidding on today have some form of.
Value add turnaround or stabilization required.
And so in order to make that.
Really.
Better chance of success for our operators, we will occasionally give a ramp where needed.
We're from two to three months in an extreme case, maybe a one or two year ramp.
So.
Generally.
Speaking that initial yield is going to be.
For Smiths in the nines.
If you if you sort of adjust for the ramps.
Okay.
Thank you.
To touch on the Dura group comments that you made in your prepared remarks on other people to us.
What kind of visibility do you have into their financials and how confident are you that theyre going to keep and granted.
In the quarter.
Yes.
We like I said, we have a really great relationship with those guys. They are an open book to us and we.
Working with them on.
On how to.
Transition a couple of buildings into better hands.
We don't expect a hiccup to rent.
Okay. Thank you.
You bet.
And there are no further questions at this time I would like to turn the call back over to Dave Sedgwick for any additional or closing remarks.
Well. Thank you really appreciate everybody's support and interest.
Happy Veterans day, and a great weekend. Thanks.
Thank you that does conclude todays presentation. Thank you for your participation and you may now disconnect.
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