Thesis: Enhancing Fundamentals
CareTrust REIT (NYSE:CTRE) is a talented nursing and senior care actual property funding belief that owns about 200 properties leased on a triple-net foundation to 18 operators throughout 21 states.
Over the previous few years, CTRE has been roughly rangebound as its tenant-operators’ financials and talent to cowl lease obligations have eroded.
However in a number of key methods, the elemental backdrop is enhancing for SNF operators and in addition for CTRE straight.
In the meantime, CTRE’s 5.5%-yielding dividend continues to seem protected and liable to proceed rising yr after yr, even within the midst of a significant portfolio transformation effort.
Let’s dive in for a midyear replace on CTRE and see if we will discern gentle on the finish of this darkish tunnel.
Midyear Replace On CTRE
Most of CTRE’s portfolio is in expert nursing amenities (“SNFs”) and nursing houses. The nursing care business was one of many hardest hit by the pandemic, as further precautions on high of disagreeable preexisting work situations brought on an enormous wave of employees to go away that line of labor altogether.
Whole employment in nursing care dropped by round 300,000 individuals nationwide to the bottom stage since 1993. However fortuitously, as you may see under, that self-reinforcing cycle appears to have burned itself out and circled. The business’s labor drive appears to be on the rebound.
A rebound within the nursing care workforce has a number of useful results.
First, it permits occupancy to extend. A part of the rationale that SNF occupancy wasn’t rebounding very quick after COVID-19 started to fade was that SNFs merely lacked the workers to take extra residents. Many potential residents remained sitting in hospital beds ready for a gap.
Within the second quarter, occupancy rose 98 foundation factors quarter-over-quarter at CTRE’s expert nursing amenities and 215 foundation factors at its senior housing properties.
However the labor scarcity additionally affected operators’ monetary wherewithal by pushing up wages. The employees that remained demanded greater pay, and operators additionally needed to depend on company labor (e.g. journey nurses making 2-3x greater than regular workers) to fill the hole. Big will increase in labor prices essentially eroded lease protection.
The excellent news is that as employees return to the nursing care business, wage progress appears to have peaked. CEO Dave Sedgwick talked about on the Q2 conference call:
What we’re listening to is that functions for jobs are up. Company utilization is trending downward. I spoke with an operator on the East Coast the opposite day, who mentioned that they’re now hiring all people at their facility, seniors housing operator, the historic charges earlier than the large spike. So whereas it is nonetheless elevated, I feel we’ll see some indicators that wages are moderating once more.
As tenant-operators’ funds enhance, we will see this present up in lease funds. CTRE reported money lease collections rising from 92% in Q2 to 94% in July and August.
One other method during which the atmosphere is enhancing for CTRE is in pricing of SNF properties. As rates of interest rise, lender-dependent patrons are more and more backing out of offers and reducing the customer pool, permitting pricing to return again all the way down to the degrees at which CTRE has historically made acquisitions (8-9% cap charges).
CTRE is well-capitalized and capable of challenge fairness accretively for offers. Thus, its skill to jot down checks offers it a bonus in a market the place purchaser capital is drying up.
On the identical time, the market is outwardly nonetheless sizzling sufficient to make inclinations worthwhile. In February, administration introduced their intent to promote, reposition, or re-tenant about 10% of its whole portfolio by base lease. It is trying like most of that can be achieved through inclinations that then get reinvested into higher-quality properties/tenants.
Administration says that they count on to finish the majority of the portfolio transition by the top of the yr.
On the identical time, CTRE continues to make investments. Yr-to-date, CTRE has invested $144 million into new investments at a mean yield of about 9%. These are principally loans to SNF operators which are secured by actual property. As property costs fall, administration expects to return to creating extra direct actual property property investments going ahead.
Even amid business headwinds and portfolio transformation, CTRE seems intent on persevering with its coverage of sustaining and rising its dividend yr after yr. Earlier this yr, the REIT upped its dividend by 3.8%.
The payout ratio sits at a cushty 71% primarily based on normalized FAD.
Steadiness Sheet Power
CTRE’s stability sheet stays resilient. Though CTRE has elevated borrowings on its credit score facility to $205 million from $80 million on the finish of 2021 (in all probability to fund investments), the REIT had loads of room to let leverage metrics rise, because it was underleveraged (in accordance with its personal targets) earlier than.
There nonetheless stays whole liquidity of $401 million ($16 million in money plus $385 million of availability on credit score facility), which quantities to twenty.5% of CTRE’s present market cap.
In the meantime, internet debt to normalized EBITDA of 4.3x solely simply broke into administration’s goal vary of 4-5x.
Since this debt was simply credit score facility borrowings, I do not imagine the online leverage ratio metric will stay above 4x indefinitely.
Although CTRE has a sub-investment grade credit standing of BB+/Ba2, the REIT enjoys a really low price of debt, with a weighted common rate of interest of three.4% in Q2. This goes a great distance towards attaining the very excessive mounted cost protection ratio of seven.5x.
Although solely about half of debt is fixed-rate, CTRE does get pleasure from favorable phrases on its floating price time period mortgage, which ought to preserve that borrowing price affordable even because the Fed hikes charges.
Whereas there’s nonetheless some execution danger surrounding administration’s plan to transition/recycle 10% of the portfolio this yr, I imagine in CTRE’s long-term progress prospects.
The labor scarcity within the nursing care business will in all probability persist for the foreseeable future, however that truly offers a bonus to the upper high quality operators within the house that may afford to stay totally staffed. CTRE’s portfolio transition seems to be an effort to pay attention solely on these robust operators, led by the REIT’s ~37% publicity to The Ensign Group (ENSG) with its >3.5x lease protection.
Plus, after listening to a number of convention calls now, I simply get an excellent intestine feeling about administration. They strike me as straight-shooters who usually are not solely good but in addition trustworthy and humble. In any case, we as particular person shareholders are investing on this staff of buyers simply as a lot as we’re investing in a portfolio of properties or a stability sheet.
You will discover greater yields within the SNF REIT house, particularly with Omega Healthcare Buyers’ (OHI) 8.4% yield, however I do not imagine one can find a safer dividend than the 5.5%-yielding one supplied by CTRE.