CareTrust REIT, Inc. (CTRE) is a self-administered, publicly-traded real estate investment trust (REIT) that is capitalizing on the current interest rate environment to drive significant growth. The company owns, acquires, finances, and leases skilled nursing, seniors housing, and other healthcare-related properties to independent operators.
Business Overview
CareTrust REIT's business model is centered around its ability to identify and partner with high-quality operators in the healthcare real estate sector. As of March 31, 2024, the company owned 228 facilities, comprising 24,189 operational beds and units across 29 states, with the highest concentration of properties located in California and Texas. In addition, the company had $233.3 million in other real estate related investments, including preferred equity, mortgage-secured loans, and mezzanine loans.
Financials
The company's strong financial performance in recent years has positioned it well to capitalize on the current interest rate environment. For the full year 2023, CareTrust REIT reported annual net income of $53,735,000, annual revenue of $198,599,000, annual operating cash flow of $154,767,000, and annual free cash flow of $143,791,000. In the first quarter of 2024, the company continued this momentum, reporting a 32.9% year-over-year increase in normalized FFO to $46.5 million and a 33.1% increase in normalized FAD to $48.7 million.
Investment Strategy
CareTrust REIT's robust investment pipeline and fortress balance sheet have been key drivers of its success. During the first quarter of 2024, the company closed approximately $205 million in new investments, including $154 million in acquisitions or loans with purchase options at an average yield of 9.4%, and $52 million in mezzanine loans at an average yield of 13.6%. As of March 31, 2024, the company had $451 million in cash on its balance sheet and $600 million in available borrowing capacity under its revolving credit facility, resulting in a net debt-to-EBITDA ratio of just 0.6x.
The company's strategic approach to lending has also been a differentiating factor, as it focuses on providing capital to operators and borrowers who are likely to result in future real estate acquisitions. In the last 12 months alone, CareTrust REIT attributes approximately $260 million in real estate acquisitions and another $200 million in its current pipeline to this lending strategy.
Outlook
Looking ahead, the company has provided guidance for 2024, with a range for normalized FFO per share of $1.42 to $1.44 and normalized FAD per share of $1.46 to $1.48. This guidance includes all investments made to date, a diluted weighted average share count of 140 million shares, CPI rent escalations of 2.5%, total cash rental revenues of approximately $210 million to $211 million, interest income of approximately $44 million, and interest expense of approximately $33 million.
Geographic and Tenant Diversification
CareTrust REIT's geographic diversification is another key strength, with properties located across 29 states. As of March 31, 2024, the company derived 31% of its revenue from California and 20% from Texas, the two states with the highest concentration of properties. The company's tenant diversification is also notable, with its top two operators, Ensign and Priority Management Group, accounting for 30% and 13% of total revenue, respectively.
Risks and Challenges
The healthcare real estate sector, and skilled nursing in particular, has faced significant challenges in recent years, including the impact of the COVID-19 pandemic, staffing shortages, and regulatory changes. CareTrust REIT has navigated these headwinds effectively, maintaining strong lease coverage ratios and working closely with its tenants to ensure their long-term success.
One key risk factor for the company is the potential impact of healthcare reform legislation, such as the recent CMS rule on minimum staffing requirements for nursing homes. While CareTrust REIT is not directly responsible for the operations of its tenants' facilities, any regulatory changes that adversely impact their financial performance could ultimately affect the company's rental income and overall profitability.
Conclusion
Despite these challenges, CareTrust REIT's strategic focus, disciplined approach to capital allocation, and strong balance sheet position the company well to continue its growth trajectory. The company's ability to capitalize on the current interest rate environment, coupled with its deep relationships with high-quality operators, make it an attractive investment opportunity in the healthcare real estate sector.