A new deal that extends CareTrust’s partnership with the Ensign Group is an example of the company’s willingness to “lend with a purpose” as a means to grow its real estate holdings, leaders said Friday while discussing first-quarter earnings.
The real estate investment trust funded a $26.7 million mortgage loan for the purchase of two skilled nursing facilities in Tennessee, with the option to buy the facilities in the fourth year.
The company’s “fortressed balance sheet” has made it a sought-out partner in the current high-interest environment, said CEO and President Dave Sedgwick. But he said the REIT remains resistant to lending without at least a handshake deal that any partnership will lead to acquisition opportunities in the future.
“Healthcare real estate, skilled nursing in particular, requires a high level of discipline. Every acquisition should immediately or quickly be accretive and must be matched with the right operator,” Sedgwick told analysts on the earnings call. “We are building a company to outlast all of us. We are not nearly as sensitive as the algorithms are to quarter-to-quarter numbers. We run the business for long-term value creation, and will at times, when the pipeline justifies it, take some short-term dilution to lock in permanent financing and accretion and thereby set the table for future growth.”
And CareTrust remains poised for growth. In addition to $205 million in deals made so far this year, leaders said in a press release late Wednesday that CareTrust still has $260 million in deals in the pipeline.
That pipeline is split about 50/50 between loans and acquisitions, Sedgwick explained.
A highlight is one “larger” skilled nursing deal” the company has been pursuing “for some time.” Segiwck said its inclusion in pipeline spending estimates means CareTrust expects to close on it within the next 12 months.
He categorized the REIT as being better positioned to “invest and grow than at any point” in its history. With its current portfolio, CareTrust reported a 0.6 net debt to EBITDA ratio, a factor used to understand a company’s financial risk. Generally, companies with a ratio under 2.0 are considered lower risk, while those with a ratio over 4.0 are higher risk.
Sedgwick noted it could deploy its $345 million in cash assets and use a currently undrawn $600 million line of credit and still come in with a ratio of 3.6.
“In other words, we are locked and loaded to grow in a meaningful way for the next few years,” he said.
Challenges remain
Still, the company acknowledged some headwinds.
It continues to try and divest 11 Midwestern properties for which an identified buyer has yet to secure financing. Sedgwick said the other party has made a $1 million non-refundable deposit and continues to work in “good faith” toward finalization of the sale.
The new federal staffing rule would dig into operators’ margins, potentially putting added pressure on rent payments.
“We remain disappointed with a rule that is impossible to implement given the widely publicized staffing shortage in skilled nursing and throughout healthcare today,” Sedgwick said. “We remain hopeful that reasonable heads will prevail in DC to modify or reverse course altogether before the mandate takes effect.”
An analyst noted that operator WLC Management, with a 19-facility skilled portfolio, has seen its debt ratio slide over the last several quarters. But Sedgwick said the long-time tenant remains on solid ground, especially as it rebuilds its share of patients needing skilled care and begins to benefit from better Medicaid rates that became effective April 1.
CareTrust collected 98% of rent due in the first quarter. The remaining 2% Sedgwick attributed to non-top-10 operators, mostly in seniors housing, who are “not performing as we would like” — but whose “worst performance is behind them.” The company expects underpayments to improve in future quarters.
In addition to Ensign at No. 1,
CareTrust’s top operators (based on rent) as of quarter one were:
1. Ensign
2. Priority Management Group
3. PACS Group
4. Cascadia Healthcare
5. Covenant Care
6. Bayshire Senior Communities
7. The Pennant Group
8. Eduro Healthcare
9. Links Healthcare Group
10. WLC Management
Read more coverage of the call in McKnight’s Senior Living and in the McKnight’s Business Daily.
