CareTrust REIT, Inc. (CTRE) Q2 2025 Earnings Report, Transcript and Summary

Thank you for standing by. My name is Janice, and I will be your conference operator today. At this time, I would like to welcome everybody to the CareTrust REIT Announces Second Quarter 2025 Operating Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Lauren Beale, CareTrust's Chief Accounting Officer. You may begin.

Thank you, and welcome to CareTrust REIT's Second Quarter 2025 Earnings Call. We will make forward-looking statements today based on management's current expectations, including statements regarding future financial performance, dividends, acquisitions, investments, financing plans, business strategies and growth prospects. These forward-looking statements are subject to risks and uncertainties that could cause actual results to materially differ from our expectations. These risks are discussed in CareTrust REIT's most recent Form 10-K and 10-Q filings with the SEC. We do not undertake a duty to update or revise these statements, except as required by law. During the call, the company will reference non-GAAP metrics such as EBITDA, FFO and F-A-D or FAD. A reconciliation of these measures to the most comparable GAAP financial measures is available in our earnings press release and Q2 2025 non-GAAP reconciliation that are available on the Investor Relations section of CareTrust's website at www.caretrustreit.com. 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; James Callister, Chief Investment Officer; and Derek Bunker, SVP, Strategy and Investor Relations. I'll now turn the call over to Dave Sedgwick, CareTrust REIT's President and CEO. Dave?

Well, good morning, everybody, and thank you for joining us. Before I share the highlights for the quarter and the many good things yet to come, I think it's important to take a minute to step back and put our growth over the past 2 years in context. In the second quarter and since, we closed on approximately $1.1 billion of investments, highlighted, of course, by our acquisition of Care REIT and entry into the U.K. care home market closed in May. Over the past 18 months, we have deployed roughly $2.7 billion of investments, eclipsing the total amount we invested in the prior 8 years since our inception. During our Q4 call, when we were celebrating a record $1.5 billion of investments in 2024, which is 7x the amount of our annual average, I mentioned how we would not rest on that record, but would instead continue full steam ahead. Well, we quickly followed through and closed our first M&A deal in the Care REIT acquisition in May, diversifying our operator bench, our asset type mix, our payer mix, our geographic concentration and providing a compelling exposure to a key market in which we expect to grow simultaneously with our U.S. opportunity set. Again, the team did not stop there. Since closing on CareREIT, we closed on another nearly $220 million of investments and yesterday announced a reloaded pipeline of approximately $600 million that James will talk about in his update. Now the results of this record pace of investments is total revenues are up 63.3% in the second quarter over the prior year quarter. Normalized FFO per share is up about 19% and normalized FAD per share is up about 16%, each over the same period. We've also increased our quarterly dividend by 15.5% year-over-year while maintaining a comfortable payout ratio. Turning to an update on the quarter. The integration of the Care REIT assets is off to a strong start. James has promised not to use the word plucky again in this, and I promise I won't use a British accent, but I will say we are chuffed with the operator relationships that we stepped into and have already game plan with many of them how to grow together in the near future. We continue to introduce ourselves to the market and expect more care home opportunities to find their way into our pipeline over time. At the end of June, we acquired Care REIT's former external manager and began the integration of those employees into CareTrust. They are a talented group that brings to the table experience with these assets in market and deep relationships with operators and other key industry participants. And we believe a CareTrust U.K. team will help us source, identify, underwrite and close on growth opportunities there. While it's fun to celebrate all of our recent investments, and it's important to highlight what makes us so excited about the near- and long-term future prospects, I'll reiterate what I conveyed on the last few earnings calls. We are not done. We very much feel like we're still in start-up mode and hungry to prove ourselves and produce sustainable FFO per share growth over many years to come. In order to keep the flywheel ripping, along with investing in real assets, we've been investing in the people and systems to support their integration and our future growth. In addition to building out our U.K. presence, we've added key professionals here in the U.S. across tax, finance, investments and asset management that position us to grow in more markets in more diversified ways. Our expanded team is stronger, smarter and hungrier than ever before. And this behind-the-scenes investment in the team, like our investments in real assets will continue to pay off over time. With that, I'll hand it off to James for a report on investment activity and the acquisition landscape.

Thanks, Dave. Good morning, everyone. During the second quarter, in addition to closing the Care REIT acquisition in May, we completed the acquisition of an external manager and began the process of welcoming those employees to CareTrust. As Dave mentioned, leveraging this platform allows us to focus simultaneously on our growth in both the U.S. and U.K. across skilled nursing, seniors housing and care home asset types. Also in the quarter, through a joint venture where we provided approximately 95% of the total required investment capital, we closed on an approximately $146 million portfolio of 10 skilled nursing assets in the Pacific Northwest leased to 2 high-caliber existing operators. These are quality assets that we're very excited about, and it's a testament to the hard work of our team up and down the organization to close on a transaction of this size immediately on the heels of the Care REIT deal. In the rest of the quarter and since, we've deployed approximately $110 million in additional capital across skilled nursing real estate acquisitions, preferred equity investments and a mortgage loan. These deals bring our total investments closed year-to-date of approximately $1.2 billion. As we look forward, our investment pipeline remains strong, sitting at approximately $600 million. The quoted pipeline includes some singles and doubles as well as some mid- to large-sized portfolio transactions and primarily consists of skilled nursing facilities, but also includes a couple of seniors housing deals and a U.K. care home opportunity. Please remember that when we quote our pipe, we only include deals that we have a reasonable level of confidence that we can lock up and close within the next 12 months. We continue to see a robust pipeline of both broker marketed deals and off-market opportunities sourced through our operator network and other relationships. The flow of prospects span skilled nursing and seniors housing assets, both triple-net and SHOP with a measured yet meaningful uptick in overall volume. At the same time, we're building our pipeline in the U.K., actively evaluating potential acquisitions across the pond and regularly meeting with established and new operators who value a capital partner like CareTrust in a capital tight environment. The U.K. care home sector represents an additional avenue of accretive growth where our rigorous underwriting, operational expertise, strong balance sheet, advantaged cost of capital and proven certainty of closing position us to win. Importantly, our pursuit of U.K. transactions will not slow our primary focus on sourcing and executing high-return real estate acquisitions in the United States as evidenced by around $215 million in U.S. investments closed post Care REIT acquisition and by our reloaded pipeline. And with that, I'll turn it over to Bill.

Thanks, James. For the quarter, normalized FFO increased 58.2% over the prior year quarter to $83.1 million and normalized FAD increased by 53.9% to $83.1 million. On a per share basis, normalized FFO increased $0.07 or 19.4%, $0.43 per share and normalized FAD increased $0.06 or 16.2% to $0.43 per share. During the second quarter, we raised approximately $355 million of cash from equity sales under our ATM and closed on a $500 million term loan. These proceeds allowed us to fund investments, including a portion of the U.K. to pay off our revolver balance as of June 30 and subsequent to quarter end, pay off approximately $260 million of debt we assumed as part of the Care REIT acquisition. Also after quarter end, we entered into an interest rate swap to fix the rate on our new term loan for a period of 3 years with a go-forward all-in rate of 4.6%, bringing our fixed rate debt as a percentage of total debt to 93%. In yesterday's press release, we raised guidance for this year to $1.77 to $1.79 for both normalized FFO and normalized FAD per share. This guidance includes all investments closed to date, a diluted weighted average share count of 195.3 million shares and also relies on the following 6 assumptions: 1, no additional investments nor any further debt or equity issuances this year; 2, CPI rent escalations of 2.5%, our total cash rental revenues for the year are projected to be approximately $338 million. Not included in this number is straight-line rent of $8 million and the amortization of lease intangibles of $2 million; 3, interest income from financing receivables of $12 million; 4, interest income of approximately $87 million, which is made up of $80 million from our loan portfolio and $7 million from cash invested in money market funds; 5, interest expense of approximately $44 million, which includes roughly $5 million of amortization of deferred financing fees; and 6, G&A expense of approximately $48 million to $52 million and includes about $12 million of stock compensation. Lastly, our liquidity continues to remain strong. In addition to $65 million of cash on hand, we have $1.14 billion available under our revolver. And despite our record pace of investments, we continue to maintain low leverage with a net debt to annualized normalized EBITDA of 2x. Our net debt to enterprise value was 12.3% as of quarter end, and we achieved a fixed charge coverage ratio of 8.2x. And with that, I'll turn it back to Dave.

Thank you, Bill. Super excited about the performance and super grateful and proud of the team for what we've been able to accomplish over the last couple of years and last quarter. Happy to take your questions.

[Operator Instructions] Your first question comes from the line of John Kilichowski from Wells Fargo.

Maybe if we could just start on the pipeline. Would you mind kind of talking about the composition of that? I'm curious how much of a contribution in the U.K. is already starting to see and if you're seeing that ramping? And then maybe part 2 of that would be what percentage of that is SHOP, if any? And Dave, you get bonus points for using British accent?

I'm going to defer it to James to answer this one. And will see if [indiscernible] accent or not.

I got to be chew to myself. So it's just going to be me. The pipeline, John, the majority of it is still U.S. skilled nursing. The remainder of it is a combination of U.S. seniors and U.K. There's definitely a U.K. transaction in there, and that ramp continues to grow as we continue to engage in and develop relationships with the broker and operator community. And I think there is a component of the seniors housing in the U.S. that does consist of SHOP. We have 12 months to realize on that, but we are continuing to actively look at SHOP and try to source the right deals when we find them.

Got it. That's helpful. And then of the SHOP deals that you're looking at, could you kind of talk about maybe strategically the ones that you're interested in, whether it's core, core+ or value-add and the kind of what tier markets are you looking at? I'm just kind of curious how you're positioning yourself versus peers.

Yes. I mean I think we're pretty open, John. I think we're really focused on the right operator manager relationships based on the deals that come in and looking at can we really find an operator or managed solution that we really like and bet and get comfortable with. I think we're pretty open on the deals. I think we're going to be more competitive in some than others. So I think we're really looking at everything, focusing on the right operator management solution for that deal and focusing on the ones that maybe others will be more competitive than we would, but focusing on the ones we feel like in our lane and that we can source the right operator for.

Your next question is coming from the line of Farrell Granath of Bank of America.

This is Farrell Granath. I also just wanted to dig in a little bit deeper on what you're seeing in your pipeline as some of the overhang when it came to SNFs has kind of lifted slightly with the passing of the reconciliation bill. I was wondering if you've seen anything else come into the market more or if you've seen greater competition for assets of both SNFs, senior housing or even SHOP as you're coming to the table?

I don't think we've seen a meaningful uptick or impact from The Big Beautiful Bill on deal flow at all. I think that you still see regional owner operators and mom-and-pops starting to bring assets to the market as their recovery is kind of made most of their way through their recovery following COVID. And as that has stabilized, a lot of them bringing more stuff to bear and to the market. But I haven't seen really any impact from The Big Beautiful Bill. I think that deal flow is consistent. It's probably been a little uptick recently. I think that it's pretty much the same buyers at the table in the skilled nursing market as it's been for a while. I would say on seniors, maybe a few more entrants on the private equity side, private money side, but still primarily the publics and the known private equity groups who have been there for a while now.

Great. And my second question is about the potential synergies as you were just mentioning about the integration of the CRT team of what we could maybe see, especially given your G&A ticked up slightly and with the expectation of that going forward of what that could turn into even in out years?

Farrell, this is Derek. I think, first of all, it's going really well. We're excited about those teams. And we felt like with the record pace of investments in real assets over the past 18 months, it was important to make sure we build a team around it to take care of it and to position ourselves for that diversified growth across markets and kind of future opportunities. So I think you'll see that continue to bear out through the rest of the year. But we feel like we've made a lot of headway. We've -- at the end of June, we brought in those U.K. team already, and we made quite a bit of investment in the U.S. team as well. So it may not be done, but we've made a lot of headway. We're really excited about the progress so far and feel like we've positioned ourselves well to support that growth.

The next question is coming from the line of Michael Carroll from RBC Capital Markets.

I guess, James, I wanted to quickly touch on the pipeline where you said that there were a few seniors housing deals. I mean, are those deals SHOP deals? Or are they just traditional triple net lease type transactions?

There's some of both in there, Mike.

And then I know like how can you talk about like the RIDEA platform that you've been kind of looking to get into? I mean, are we -- how is that market looking? Are we any closer to some type of transaction on that side or anything interesting out there to you?

I would say that with respect to RIDEA, what we've been saying for, I guess, about the last 18 months is still very true, which is like James said, we're looking at a range of opportunities, a range of entry points from large deals that would come with a team and platform all the way down to onesie-twosies that would be a more modest entry. And we're going to be opportunistic. We don't feel any pressure to be fast about it. We want to get it right. And I think James' answer to the previous question was right on where it's less about the size of the deal for SHOP, and it's all about the operator. When you look at our lease coverage, it's so high, relatively speaking, and that's based on matching great opportunities with great operators. And if we can stay true to that with respect to SHOP as well, then all of our energy can really be focused on growth. And -- and so I'll say we continue to look at the field, and we'll be opportunistic. I'd be really surprised if we didn't get something done with respect to SHOP within the next 12 months.

All right. That's helpful. And then I guess last for me is, has the competitive landscape made it more difficult, I guess, specifically on the seniors housing side? I know cap rates for SNFs rarely change. I'm assuming that, that's still kind of holding true. But are you seeing any type of compression on the seniors housing side that might make it more difficult?

I wouldn't say they make it more difficult. You just have a much bigger range in the seniors housing world of cap rates, Mike, depending on location, the quality type, the newness of the asset, a whole host of other things. So you see just a different wider range of cap rates than you see on the skilled side. I don't think anything that makes it particularly difficult. I mean, as you get into lower cap rates, we may not be as competitive as others. But I don't think there's anything makes it particularly difficult. There are more prospective buyers, but I think with the right opportunity, when we've got the right operator, we can be pretty gritty and still compete.

Your next question is coming from the line of Alec Feygin from Baird.

First, on the new investment-grade rating, just can you speak on what you would do for the next issuance, whether private placement or another term loan and when that would be?

Yes, Alex, it's Bill. The next issuance, if we did a bond offering, we probably wait until we get investment grade from all the different agencies. And it all depends on the size would all depend on the investment pipeline and what we're closing on at the time. But with equity priced so nicely right now, that's a real good way to fund our investments.

Yes. Makes sense. And second for me is thinking of opportunities with new operators. Are you looking at new operators? And would you look to finance deals with them or buy assets right away to start relationships? And just any commentary on new operators?

Yes, Alec, I think we spent quite a bit of time developing a bench of new operators. And that's been the case from day 1. It continues to be the case. I think as we continue to execute on this pipe, you will see -- you'll continue to see a combination of growing with existing operators and bringing on some new ones.

Your next question is coming from the line of Omotayo Okusanya of Deutsche Bank.

We don't hear a question.

Sorry about that. Most of my questions have been answered, but just curious your thoughts on the overall -- I know you talked a little bit about The Big Beautiful Bill already, but like the overall regulatory backdrop, I think, again, things look like they've gone pretty well from a Medicare and Medicaid perspective this year. But if you're kind of talking about next year where you potentially have increased budget deficits because of the -- because of The One Big Beautiful Bill, does that put additional pressure potentially on what reimbursement could look like next year? Do we start to kind of have the word sequestration thrown around a little bit next year?

I suppose it remains to be seen. I think what we're really encouraged by, though, is when there was so much talk and handwringing over the risk associated to Medicaid, in particular, I think what we saw was, in fact, that Medicaid, particularly for skilled nursing, for senior care has broad bipartisan support, both at the federal and state level. And if there are some pressures more locally, I think that reality will continue to defend the Medicaid rate for senior care and prioritize it above maybe other Medicaid participants that maybe are younger, able bodied that sort of thing.

Your next question is coming from the line of Austin Wurschmidt from KeyBanc Capital Markets.

Just honing in again a little bit on sort of the relationship side. Are the SHOP operators you're speaking to mostly relationships you've had a track record worth? And would that sort of be the initial foray or your preference, I guess? Or similarly, are you casting a much wider net as you are across the skilled side?

I would say that we're casting a wider net with respect to SHOP. And these are in some respects, new relationships to CareTrust, but in some respects, long-standing relationships with individuals at CareTrust. So I think that we're going to -- we're spending a lot of time on that front, making sure that we've fully vetted these operators because the economics are different when it's a SHOP environment, and we want to make sure we get that right.

Have you spoken to any of your existing relationships within the portfolio about potential conversion opportunities from the triple-net structure to the RIDEA structure?

No, that's not our focus. Our focus is really growing that space, de novo.

Understood. That's helpful. And then just one more for me. I just would love to hear an update. You touched a little bit on the integration, but would like to hear a little bit on some of the synergy side potentially. If you could provide a figure, how far along are you in sort of realizing some of those synergies? And just any potential upside to maybe your initial thoughts now that you've had some time to digest the portfolio and integrate some of the team.

Austin, it's Derek. Yes, so far, so good. Really excited about the team. I think as we have continued to dig in and go through the process, our confidence in our forecast and what we thought we could accomplish together has only increased. I think last time we had signaled that they were on a run rate of about $10 million, and our synergies are about 50% of that. That would probably kick in mostly in Q1 next year. And I think we're still on track with all that, and it's looking solid.

I will now turn the call back over to David Sedgwick, CEO, for closing remarks. Please go ahead.

Okay. Thank you. Well, I really appreciate everybody's time and interest, and wish you a nice end of the week. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.