CareTrust REIT, Inc. Q3 FY2025 earnings call

• Dave Sedgwick highlighted pride in the CareTrust team, noting their talent, commitment, and culture. The investments team led by James Callister has grown the portfolio, the asset management team mitigated risks, and the accounting team consolidated books. - James Callister reported investment activity in the third quarter, including $59 million of investments, and a pipeline of $600 million with half in U.S. skilled nursing, 1/3 in U.K. care homes, and the rest SHOP and strategic loans. - Bill Wagner mentioned retiring as CFO and transitioning to Derek Bunker, and discussed financial results and guidance.

In the third quarter, normalized FFO increased 55.5% over the prior year quarter to $94.7 million, with normalized FFO per share at $0.45, representing approximately 18% growth over the prior year quarter. Normalized FAD increased 50.6% to $93.1 million, and normalized FAD per share was $0.44, up 12.8% year-over-year. Year-to-date total investments reached over $1.6 billion, with $495 million closed in the third quarter and a pipeline of approximately $600 million.

• Updated 2025 guidance ranges from $1.76 to $1.77 for normalized FFO and FAD per share. - Assumes total cash rental revenues of approximately $344 million to $345 million, straight-line rent of ~$9 million, interest income from financing receivables of $12 million, interest income of ~$96 million, interest expense of ~$44 million, income tax expense of ~$5 million, and G&A expense of $52 million to $53 million. - Liquidity remains strong with ~$334 million cash on hand and full capacity on the $1.2 billion revolver. - Full year '26 guidance to be provided with Q4 and full year 2025 update.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to materially differ from expectations, as discussed in CareTrust REIT's most recent Form 10-K and 10-Q filings with the SEC.

Q: Just a question for James. It's great to see the investment activity in the replenished pipeline. I was hoping you could maybe share expected yields across the 3 buckets of SNFs, U.K. care homes and seniors housing. And are you seeing those compress as the outlook continues to improve and...

A: Jonathan, sure. I think across the 3 spectrums, I mean, I don't think there's going to be too big of a surprise. I think across SNFs, you're going to see typically with a 9 handle on it for the yield, I think that now and again, we find deals where we'll trade a little bit of yield for coverage. We like that trade-off in some deals to sleep better at night. In the U.K., it's going to be pretax leakage somewhere around 8.5% or higher. And then I think in seniors, there's really a range, Jonathan, depending on the age, the CapEx needs, the market. You do see a little bit of compression in rates in seniors housing for sure. I think that depending on the market and the need for CapEx, we're still going to look for something that gives us a year 1 yield of 7% or higher.

Q: And are there any loans or preferred investments in the pipeline? Or is it all...

A: There's a couple of strategic loans or -- preferred, but not anything meaningful really, Jonathan.

Q: Just given the duration gap or timing mismatch mentioned in the guidance update, I believe you have a forward component for equity raises. Are there any plans to utilize that in the future and try and minimize that duration gap?

A: Yes. Jonathan, it's Derek. We look at everything case by case and try to match up the duration of funding with the pipeline. So I wouldn't say never, but the pipeline seems to be closing at a pretty brisk pace and replenished at an equally brisk pace. And so it hasn't made a ton of sense to kind of go down that route yet, but we'll keep that option open for the future.

Q: Can you guys provide some color on the type of investments that CareTrust has made to kind of build out its seniors housing operating portfolio? I mean when did those investments start? And should we expect like this kind of flow into 2026 with higher G&A as you kind of build out that platform?

A: Yes. I'd say we started in earnest at the very, very end of last year with bringing on a senior investment professional added to that in the middle of the year, some more bandwidth on the investment team and then data science and asset management as we near the end of this year. So not to mention tax and accounting as well. So it's been a process that's kind of gone throughout the year. I think as we go into the new year, and we'll have that first deal online, we will probably look to add, I don't know, 2 or 3 more people potentially throughout next year related to SHOP.

Q: This is Farrell Granath. I first just wanted to ask about what you're seeing in the markets compared to the U.K. and the U.S. I know you had added some commentary about that U.S. skilled nursing was your bread and butter, but it seemed like there have been some greater opportunities picking up in the U.K., which didn't, I guess, fully get incorporated into what we saw close a few -- only a few U.K. care homes. So I was curious if you could add in, is it greater competition, opportunistic pricing for what you're seeing?

A: Yes. Farrell, it's James. I think I think you have to look back a little bit in terms of when we acquired Care REIT, they've really been at a standstill for a number of years. So it takes time to build that pipeline up and get those deals under contract and going and ultimately closed. So I think that you see when we talk about nearly 1/3 of our pipe right now being U.K. that you see that pipeline swelling and getting more productive and busier, and we definitely see the trend going that way. I think that there are some recently announced very large transactions in the U.K. I think there's definitely significant activity there, and we'll continue to -- we think we remain competitive and the market we're looking at over there, and we continue to see the pipeline grow like we have really since closing the Care REIT deal, there's been a continual but consistent slow growth in the size of the pipe there.

Q: I guess just for the team as a whole, just curious of how we should think about G&A. I recognize it's early to give any sort of '26 official guidance, but any sort of parameters on how big the G&A cost side could grow next year would be appreciated.

A: Sure. Juan -- Yes. We mentioned part of the pickup this year has been tied to STIs. We've hit some pretty high targets, both in growth and performance. And that will obviously reset going into next year. So there's a little bit of a pickup there counter to kind of piggybacking off of Dave's answer just a few questions ago about some investments in our team throughout the organization to both prepare for shop as well as just the continued growth that we've seen last year and this year. So I think looking out of Q4, it will look probably similar to Q3. But going into next year, you're going to kind of see some puts and takes there. We'll have more color, obviously, next quarter. But I think you'll see hopefully some of those productivity gains and then offsetting the reset from the STI and then -- in our favor, just probably looking kind of on track to what Q3 and Q4 are looking like.

Q: Great. Just going back to the SHOP deals in the pipeline, Dave, I know you've been focused on finding the right operator. And just wondering if when we see the initial SHOP deals cross and close, should we assume that those have been struck with kind of a future pipeline in mind that's going to be sort of an expansive relationship? And then at this point in time, is there any specific number of operators that you're initially targeting?

A: So I think we'll approach SHOP as we have with skilled nursing. We'll take it case by case. And some deals will come with a pipeline of growth attached and others won't. But I think with anybody that we will do a deal with, we're going to -- we'll likely want to expand that relationship, whether there's a predefined path or not. So that's how we'll approach it.

Q: This is Farrell Granath. My first question is on the U.K. care home portfolio. I know coverage levels were stable quarter-over-quarter, but they are down a touch from the coverage levels you disclosed in May. So can you remind me what specifically has driven potentially soft revenue or outsized expenses since you closed the portfolio to drive that tick down in coverage?

A: No, I wouldn't call out anything thematic or general there. I think that's just idiosyncratic across the board and not a cause for any concern for us.

Q: Second question is a follow-up to Juan. Derek, I didn't quite follow the response. I interpret it right that the absolute dollars of G&A is going to start settling out at the Q3 and Q4 levels? Or is there another year of outsized growth ahead?

A: Yes. I mean, look, there's a lot of puts and takes. We've grown a tremendous amount. We're building out SHOP. And so each quarter, as we assess our needs, we'll probably continue to invest in both our team and platform to make sure we're meeting both the acquisitions that we've closed over the past years as well as the pipeline and really what's kind of funneling into the pipeline. The one that is resetting is the STI, and that's been kind of a big pickup from this year over the prior year. That will reset. But obviously, we've made further investments. So without trying to kind of steal the thunder from next quarter because I know that's everyone is anxiously awaiting it. I think that's just sort of the puts and takes there. It's going to be elevated because of those investments in team, but there's a little bit of a pickup when we reset that STI.

Q: Fantastic. Dave, in the press release, you made the comment that the pipeline is swelling. I'm just kind of curious, this time last year versus right now, would you say that the opportunity set looks even bigger for you kind of implying the potential for a larger '26 than '25? And then on top of that, I'd love to know how much of this pipeline is sort of being populated by the off-market deals that you were able to source from those loans that you've made previously and maybe what you think that runway is for you?

A: John, from your lips, you know what I mean, we certainly believe that the opportunity set today versus 12 months ago is expanded, right? 12 months ago, we had one sandbox to play in, and now we've got really 3. And so we do see a big potential for another significant year of growth next year. We only have really visibility into our pipeline, though. So it's hard to predict exactly how it will all shake out. But we, I would say, are more bullish than ever based on the fact that the team is bigger and stronger. We've got more engines of growth to fuel and there's plenty of activity in the funnel of deal flow above of our stated pipe.

Q: Just a little bit on underwriting. Could you remind us where these assets will land on the risk curve? What IRRs are you targeting? And then what are your expectations for stabilized occupancy and margins on these assets?

A: Yes. I mean we're looking, generally speaking, double digit -- low double-digit IRRs on all of these and that there's different ways to start and end there, but that's generally where we're at. And in terms of occupancy, again, it's going to be case by case. Ultimately, I think that there's going to -- we're hoping to get to stabilization in the low 90%. But I think that as you look over the course of a decade that realistically, the demographics are going to be really pushing that up.

Q: Great. Sorry. I just want to follow up on Rich's question, maybe refine the buy box a little bit more. Do you have a preference for higher acuity assets? Would you do IL? Do you have a preference for campuses? What are you looking for there?

A: We're omnivorous.

Q: Okay. So what about from a price point, do you have a preference for -- would you do all markets? Would you have a preference for middle markets or anything along those lines?

A: I think we're probably going to be most competitive in, call it, strong secondary markets. I think if we found some really nice #1, #2 in the market of a secondary market -- that seems like a really natural fit for us.

Q: Yes. I just want to follow up on Rich's question, maybe refine the buy box a little bit more. Do you have a preference for higher acuity assets? Would you do IL? Do you have a preference for campuses? What are you looking for there?

A: We're omnivorous.

Q: Okay. So what about from a price point, do you have a preference for -- would you do all markets? Would you have a preference for middle markets or anything along those lines?

A: I think we're probably going to be most competitive in, call it, strong secondary markets. I think if we found some really nice #1, #2 in the market of a secondary market -- that seems like a really natural fit for us.

Q: This is Richard Anderson. In terms of SHOP, you kind of talked about this in a sort of a tertiary way, but do you see you're sort of targeting more stabilized assets out of the gate? Are you comfortable going all-in value add? Or what's sort of the mentality around your SHOP execution kind of out of the gate?

A: Yes. I'd say that we're going to bring a very similar attitude to it that we do to skilled nursing, and that's really reflective of the priority of who that operator is and playing to their skill set. Not every operator in skilled nursing land or seniors housing land are turnaround artists. And not everybody is a good match for every geography. So really, the -- what we get paid to do, I think, is to match the right operator with the right opportunity. And that means that we have a fairly wide playing field there. We can do stabilize, we can do turnaround. I think it would probably -- but having said all that, I think a real tough turnaround in a tough market that requires a ton of CapEx is probably not going to be high on our list.

Q: This is Richard Anderson. And then just quickly, the obligatory [ PAC ] question. They got their forbearance extension to November 30. What are your thoughts around a possible delisting there, if that's an outcome? Any perspective that you could provide at all on [ PACs, ] assuming 30th comes and goes and we still have nothing. I'm just curious where you stand on that.

A: Yes. We really don't have any update or comment on PAC until they report.

Q: Yes, I just want to follow up on Rich's question, maybe refine the buy box a little bit more. Do you have a preference for higher acuity assets? Would you do IL? Do you have a preference for campuses? What are you looking for there?

A: We're omnivorous.

Q: Okay. So what about from a price point, do you have a preference for -- would you do all markets? Would you have a preference for middle markets or anything along those lines?

A: I think we're probably going to be most competitive in, call it, strong secondary markets. I think if we found some really nice #1, #2 in the market of a secondary market -- that seems like a really natural fit for us.

Q: This is Wesley Golladay. Yes, I just want to follow up on Rich's question, maybe refine the buy box a little bit more. Do you have a preference for higher acuity assets? Would you do IL? Do you have a preference for campuses? What are you looking for there?

A: We're omnivorous.

Q: Okay. So what about from a price point, do you have a preference for -- would you do all markets? Would you have a preference for middle markets or anything along those lines?

A: I think we're probably going to be most competitive in, call it, strong secondary markets. I think if we found some really nice #1, #2 in the market of a secondary market -- that seems like a really natural fit for us.