CareTrust REIT Is A Diamond In The Rough (NYSE:CTRE)

It’s no secret that many healthcare REITs have had a hard time in recent years, with pandemic concerns giving way to labor shortages and wage inflation. While it’s easy to be bearish on this sector, value investors may also find long-term opportunity in some names while their chips are down.

This brings me to CareTrust REIT (NYSE:CTRE), which continues to trade in value territory while offering investors a well above average yield. In this article, I highlight what makes CTRE a decent buy for income and long-term capital appreciation potential at present.

Why CTRE?

CareTrust is a net lease REIT that specializes in the ownership, acquisition, and development of skilled nursing facilities, representing 74% of its annual base rent. In addition, CTRE also has exposure to multi-service campus and seniors housing which represent 18% and 8% of its ABR, respectively.

Notably, CTRE has reduced its exposure to seniors housing, which represented 13% of ABR at the end of 2021. I view this as being a prudent move, since seniors housing has been plagued by new supply and a less-assured private pay model (as opposed to government pay skilled nursing facilities), leading to well-respected names like Welltower (WELL) and Ventas (VTR) having to cut their dividends in recent years. CTRE, on the other hand, raised its dividend every year since it was spun off from the Ensign Group (ENSG) in 2014, including over the past 3 tumultuous years.

Meanwhile, CTRE is demonstrating positive signs, as it collected 95.5% of contractual rents and generated normalized FAD per share of $0.40 during the fourth quarter. This equates to a safe 69% payout ratio.

Also encouraging, fourth quarter occupancy for both skilled nursing and seniors housing rose by 70 basis points sequentially compared to Q3, landing at 74% and 77%, respectively, and are edging their way towards their pre-pandemic rates of 78% and 81%.

CTRE’s overall tenant base is also appears to be healthy, as its top 10 tenants account for 89% of contractual rent, and have EBITDAR and EBITDARM coverages of 2.1x and 2.7x, respectively. When excluding for one tenant (comprising 2.8% of ABR) that hasn’t paid rent since November of 2022, the “all other” tenant category has still adequate EBITDAR and EBITDARM coverage of 1.08x and 1.8x.

Looking forward, the Biden Administration has announced an end to the Public Health Emergency related to COVID-19 in May of this year, and as management noted, many states have implemented policies to assist healthcare providers. While this may be viewed as introducing near-term uncertainty for CTRE, management views it as an opportunity, they believe it will result in attractive acquisition opportunities as the end to PHE may force some providers to sell their properties.

This is supported by CTRE having one of the best balance sheets amongst REITs, with a net debt to annualized EBITDA ratio of 3.7x, sitting well below the 6.0x level that’s generally considered to be safe for REITs, and below the 4.0x to 5.0x company target leverage range. CTRE also has plenty of liquidity, with $465 million in available capital on its revolving credit line and an additional $20 million in cash on hand.

This means that where others see difficulty, CTRE sees opportunity, as higher interest rates mean that those with strong balance sheets can edge out more leveraged players. This was supported by management’s comments during the recent earnings release:

The rising cost of debt is impacting many potential buyers and we’re seeing sellers and brokers prioritize certainty more than ever before. We believe this to be a primary driver for the increase in deals crossing our desk.

We are encouraged by the increased deal flow and we are beginning to see signs of sellers’ pricing expectations adjusting to the world we live in today. We are actively pursuing opportunities for external growth both with current and future operating partners.

Lastly, I find CTRE to be attractively priced at $19.91 with a forward P/FFO of 13.5. This appears to be low considering the quality of CTRE’s balance sheet, its tenant base, and the long-term growth prospects of the skilled nursing industry due to the fast-growing age 65+ cohort. Analysts expect 5.5% FFO per share growth next year, and have a consensus Buy rating on the stock with an average price target of $21.

Investor Takeaway

CTRE is an attractive REIT for income investors, as it has a safe payout ratio and has been consistently raising its dividend since 2014. Additionally, CTRE’s strong balance sheet and deep liquidity afford it the opportunity to take advantage of potential acquisition opportunities in the coming year. As such, income investors may want to take advantage of CTRE’s current attractive 5.5% dividend yield combined with long-term growth potential.