CareTrust REIT, Inc. (CTRE) Earnings Call Transcript
March 11, 2025
Earnings Call Speaker Segments
Hello, and welcome to the CareTrust REIT offer for Care REIT plc Conference Call. [Operator Instructions] I would now like to turn the conference over to James Callister, Chief Investment Officer. You may begin.
Thank you, and welcome to CareTrust REIT's investor call. We will make forward-looking statements today based on management's current expectations, including statements regarding our announced acquisition of Care REIT Plc, industry and demographic conditions, the Care Home investment and financing environment, Care REIT's future growth prospects and the benefits of the acquisition. 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 the press release issued today by CareTrust as well as 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 FFO, FAD and net debt to EBITDA. A reconciliation of FFO and FAD to the most comparable GAAP financial measures is available in our Q4 '24 financial supplement available on the Investor Relations section of CareTrust's website at www.caretrustreit.com. We have not provided reconciliations for certain other forward-looking non-GAAP measures we may disclose today as the timing and amount of adjustments to those measures is not available without unreasonable efforts. Today, we will refer to an investor presentation about the acquisition, which is also available on the Investors section of CareTrust's website. 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; and myself, James Callister, Chief Investment Officer. I'll now turn the call over to Dave Sedgwick, CareTrust REIT's President and CEO. Dave?
Thank you, James, and good morning, everyone, and thank you for joining us. We have been studying the U.K. care home market and believe we have found in Care REIT an excellent entry point. We share more than just a very similar name to quote Care REIT's Chairman of the Board, Simon Laffin. He said CareTrust core values of operating expertise, partnership with elite operators and delivering growth provide a strong fit with ours. We couldn't agree more. Let's jump into the transaction overview. So the Boards of CareTrust REIT and Care REIT have reached an agreement on the terms of a recommended cash acquisition of Care REIT, which is a U.K. listed REIT with 137 care homes across England, Scotland and Northern Ireland. The transaction now will be subject to Care REIT shareholder approval, our offer price of $1.39 or 108p per Care REIT share paid in cash, represents an equity value of $577 million or an enterprise value of approximately $817 million when combined with $240 million of net debt. It also produces what could be an estimated accretion in year 1 of 6% to 3% on an FFO and normalized FAD basis, respectively. I'll go into a little bit more detail about the accretion scenarios in just a minute. The deal will happen after a vote by the Care REIT shareholders, and we expect to close in the second quarter of 2025. Let me give you a little bit of a high profile look at Care REIT. We've got in this portfolio, 137 homes approximately 7,500 operating beds, 15 operators, 89% occupancy and approximately $66 million of contracted rent, with 2.2x EBITDARM coverage and I'll show you in just a minute, the pro forma impact to our portfolio's operator, geography and asset class diversification. Let me talk about a little bit the rationale and the key benefits of this transaction for us. There's an attractive underlying U.K. care home market that I said that we've been studying for quite some time. There's some very similar structural tailwinds in the U.K. that we have deep experience with here in the United States. In this platform, we find a very strong track record of growth and potential for future development through both deployment into the existing portfolio as well as future acquisitions with existing operators and new operators. Also, Care REIT provides a high-quality portfolio of triple net leases, featuring long remaining lease terms and inflation-based escalators. It has robust operational metrics, including outstanding rent coverage and strong occupancy and an enhanced portfolio diversification of asset class, geography and operators in itself, but what that does for us also I'll illustrate for you in just a minute. And then lastly, of course, the deal will be accretive in year 1. So let me just drill down on each of those points very briefly. First, we have studied the U.K. market and like I said, see very similar favorable sector tailwinds for investment. We see here the expected growth in demand from the aging population in the U.K., coupled with an undersupply of beds. On this slide, it demonstrates how the U.K. care home market like both the skilled nursing and seniors housing segments in the United States is largely fragmented with a high number of small to midsize operators. And here, we just take a look at really the investable market, we see plenty of opportunities for future growth. The future growth for CareTrust could be meaningful for us in the U.K., providing us another growth engine apart from the U.S. skilled nursing and seniors housing engines that we've had so much success with. The platform itself has been very successful. And we're excited to combine not only the Care REIT portfolio, but also their team with its local London office and deep experience in relationships. So we intend to combine together to invest in the existing facilities and expand with existing operators and also look to nurture new relationships for external growth as well. Here we give you, since 2017, a look at how this platform has grown through both acquisition and investment in and expansion of their existing properties. Here, you see just the makeup of these leases. It's very, very similar to the CareTrust REIT model. They have all triple net leases and almost all of them have a floor of either 1% to 2% and a cap of either 4% to 5% and an average remaining lease term of approximately 20 years. We also really like and of course, the EBITDARM coverage of 2.2x, especially when you consider the nature of these facilities, which are essentially a hybrid of seniors housing and skilled nursing, though, in our view, they track more closely with the assisted living and memory care segment here in the United States. When looking at the EBITDARM coverage from that view, there is a lot to like. Now let me just show you and illustrate what this does for CareTrust in terms of diversification. Care REIT also provides meaningful diversification on several fronts. Here you can see the pro forma improvement to both our operator and geographic concentration with the addition of Care REIT. And here, the diversification story is maybe even more compelling and pronounced for us as our pro forma concentration in U.S. skilled nursing facilities properties goes from 77% to 49%. And on a rental income basis, U.S. skilled nursing facilities goes from 78% approximately to 63%. Finally, this combination presents a range of accretion outcomes depending on our ultimate mix of debt and/or equity to finance the deal. At the midpoint of the range of accretion, you have 6% to normalized FFO and 3% to normalized FAD. And lastly, we illustrate the strength and capacity of our balance sheet to accretively grow the business in a significant way regardless of the volatility in the market and still be set out for executing on our regular way pipeline in addition to this acquisition. So as you can tell, we're very excited about this opportunity. It makes sense and checks just about every box that we could look for, for an entry point into the U.K. Be happy to take your questions now if you have any.
[Operator Instructions] Your first question comes from Wes Golladay with Baird.
Can you talk about how long you've been looking at this deal exclusively at the CareTrust deal or the Care REIT deal and then are you describing any platform value expansion opportunities? You did mention you could grow the portfolio meaningfully. Can you also talk about how much exposure you're willing to have in the U.K.
Okay. So Wes, all great questions. I just wanted to note that the acquisition in the U.K. comes with some special regulations. So there's the takeover code in the U.K. that governs how much we can talk about the deal. The announcement that we gave, it's called the 2.7 announcement. You'll find that posted all over. That really outlines the main points of the deal what we've agreed to between the 2 companies so far. That our press release and the investor presentation here kind of governs everything that we can talk about and what I really can't do is share material new opinions or information. So with that caveat, and I may have to kind of refer to that a couple of times here. It's a little bit unusual candidly from what we're used to in the United States with respect to what we can kind of talk to. But we've got to respect that takeover code that governs this transaction. So we've been looking at this opportunity since last year and really made the offer began trying to engage with the company toward the end of last year, late last year. And I probably -- the offer kind of stands on its own speaks for itself in terms of what we valued the deal at and then with respect to plans for future growth, we intend to grow meaningfully in the U.K. if just like the United States, depending on the deal flow, right? We never want to get too ahead of ourselves with respect to predicting growth in any particular segment or style. That's why when we give guidance, for example, we don't bake in any growth projections. So without getting too far ahead of myself there, I would just refer back to my main point, which is it could be meaningful growth for us going forward.
The next question comes from Juan Sanabria with BMO Capital Markets.
Congratulations. Hoping you could talk a little bit more around the parameters around the accretion? It looks like the low end assumes that FAD could actually go down a tiny bit? So just curious on kind of the cost of debt you guys are assuming or the range of the cost of debt and the range between the percent that's equity funded on CareTrust behalf to fund a deal versus debt?
Yes. So I don't think that we have stated anywhere what kind of those cost of debt figures are. So we can't -- I don't think we can talk to that quite yet in terms of debt that we would be assuming versus new debt issuance. I think you know pretty well what our -- how we view our cost of debt today for anything that we would issue new -- do any new issuance. But basically, the range here shows from 100% debt financing to 100% equity financing. And that's sort of the low and high end of the range.
And sorry, just for our benefit and others maybe just listening. And where do you think you can raise 10-year debt at CareTrust today, just to give us a sense of at least on that variable?
Bill, what's the latest and greatest on that?
Around 6%.
Great. And then if I could just sneak in 1 more. Could we think of the EBITDAR coverage is 30 to 40 basis points lower than DARM? Is that a fair delta between those 2 metrics?
It's probably too early for us to give much commentary on that. We would just have to refer to you to their website and their disclosures on how they calc it.
[Operator Instructions] Your next question comes from Jonathan Hughes with Raymond James.
And congrats on the acquisition. I realized you are a bit limited in what you can say, but maybe will this entire Care REIT U.K. team, be kept in place and operate effectively as a U.K.-based subsidiary, how is growth -- future growth going to be driven within the U.K.? Is it U.S.-based? Or is the team over there going to be driving the growth?
Yes. Great question, Jonathan. Thank you. I think we have some high-level ideas of how we'll answer that question. But I presume it will evolve with time. But as we sit here today, the plan is to keep essentially the team in place and really leverage their experience and relationships and local industry knowledge to benefit the company in terms of growing and fostering new relationships and knowing which opportunities for expansion and asset management exists. So I think it will be largely driven by the London team with collaboration from us, of course.
And then on the timing, I think I saw expected to close by the end of next quarter. That seems quick for a cross-border deal of this size. I guess my question is do licenses transfer a little faster over in the U.K. I think we heard one of your large operators on their last call, said that license transfers were actually taking exceptionally long. So just trying to understand you have any risks or potential delays to timing.
Looks like James wants to answer that one.
No, I'd just say, Jonathan, that there won't be license changes here. So that wouldn't be a delay in the timing of the transaction.
Okay. And that's because it's being structured as effectively an acquisition and not one off.
And that the operators aren't changing.
The next question comes from Omotayo Okusanya with Deutsche Bank.
Congratulations on the deal. I'm just trying to understand the pro forma FAD and FFO numbers that you put in the presentation. When I look at it, the high end of your range is kind of going up much more versus the low end of the range. I think the low end is up about $0.05 and the high end is about $0.10 or something like that. Trying to understand a little bit why like both the high end and low end didn't go up about the exact same amount.
Well, at this point in the process, we can really -- we're a little bit limited in talking about all the assumptions that go into it. But really what's driving it, like I said, is the mix, the difference of debt versus equity in terms of how we finance the deal. But we've -- at this point, Tayo, we've laid out all the assumptions that we can because if it's not covered in the 2.7 announcement or here, it's not something can -- unfortunately, based on the takeover code, elaborate much on.
Got you. That's fair enough. And then I apologize if I missed it, but the debt you're assuming, could you talk about the rate on debt? And when that actually matures...
Tayo, your connection is not great for me. So could you repeat that?
The debt that you're assuming as part of the transaction, could you talk about the interest rate on the debt and when it matures?
No, I think what we would have to do at this stage is point you to Care REIT's public filings. And have you look at it there because I don't believe we've talked about that specifically in the 2.7 announcement or here. Have you -- I'd highlight the fact that they're going to have their earnings results call, I believe this Thursday. So we can all kind of listen in and find out more from them.
Your next question is a follow-up from Wes Golladay with Baird.
Just a real quick maybe philosophical question on hedging, maybe future deals. How would you think about managing the FX exposure?
Well, I think with respect to that, we will -- we'll share with you our hedging policy as we get closer to the close of the transaction. It's certainly something that we will develop and present to the -- to our investors on how we're going to take care of that.
Your next question is a follow-up from Juan Sanabria with BMO Capital Markets.
Just not sure if you'll be able to answer this. But for the accretion math, are you assuming U.S. debt or U.K. debt and is there a meaningful difference between the 2, depending on where it's sourced to help finance CareTrust's acquisition.
Bill, you want take that one?
I think you kind of answered it throughout the multiple questions that you've kind of fielded on this. I would just say we're trying to lay out a range here. To give an idea based on what we disclosed in the press release where we talked about an initial yield on the total investment and layered in some scenarios which generates the range as to how we finance it. I just want to point out that we did just recently redo our revolver and there's $1.2 billion of capacity on it.
And then just 1 other quick question. Is there sort of land bank or development opportunity that's part of the existing portfolio? Or is that -- how should we think about that?
It's not something that we cover in the 2.7 or here. So again, that would be an area to look to the company's disclosures and website and earnings results for more color there. But I would tell you, we do have a slide in the deck that talks about here, it shows how they've invested over the years, and it has been a combination of acquisitions and expansion, asset management type work. So I think there's going to be a mix of opportunities for both going forward.
And just 1 last one, if you wouldn't mind humoring me. What's the latest thought on SHOP as a broader strategic expansion opportunity? Is that still on the table? Or just how are you thinking about that as of today?
Yes. I'd say our thoughts on SHOP have not changed since from the last, call it, 18, 24 months of how we've been talking about that.
The next question is a follow-up from Omate Okusanya with Deutsche Bank.
Can you hear me?
Yes, we can.
Okay. Sorry, I'm kind of in a tight spot right here. In the deck, there's a really good slide that you kind of talked about the sources of revenue within the U.K. between public and private and clearly, there's a larger private piece of it versus the U.S. Can you just talk a little bit about that kind of structure. And even on the public side, whether it's more of the overall U.K. government period, whether it is local councils paying it on behalf of the residents and kind of any potential kind of government-related risk associated with the public piece of the revenue?
Yes. Thank you. Like I said earlier in my prepared remarks, the U.K. care home as we've gone over there and walked facilities and gotten to know the market well, spoken with operators about it, it's sort of a hybrid between skilled nursing in the United States and seniors housing, assisted living, memory care type of a facility. And in my view, it tracks more toward the assisted living memory care as sort of the base case offering with some nursing home or a skilled nursing type offerings as well, each building will have a different mix with respect to that. And each building is going to be a little bit different in terms of its mix of payer sources based on its perceived quality. Is it a brand new private pay only type place or not. And so you do have, like in the United States, a range of offerings and that is going to be reflected by the private and public mix. The public funding is largely local councils that operators negotiate with each year to get that rate right for their residents. And then -- but you see here on the slide that the private funds are -- the private funding is actually growing a little bit more than the public. But at the same time, it's a long tradition of both private and public funding for this in the U.S. investor view, sort of a hybrid model.
This concludes the question-and-answer session. I'll turn the call to Dave Sedgwick for closing remarks.
Well, thank you. We really appreciate the interest, the support, as you can. I'm sure imagine we have both sides, CareREIT and the CareTrust team have been working very hard to get to this point, and we really appreciate Simon Laffin, the Chairman of the Board. We appreciate the entire Board, Andrew Cowley, Mahesh Patel and the entire team over at Care REIT, they've done a fantastic job, and we're honored that we have a chance, hopefully, to combine our companies to build on their amazing story so far. And what we think it does for us as CareTrust, I've highlighted that here just to reiterate the diversification that it brings us and the extra engine of growth is -- could be very special for us. And we really look forward to what we hope is a successful shareholder bid and closing of this sometime in the next quarter. So really appreciate all of your interest and support. If you have any other questions, of course, you know where to find us. And hope you have a great day. Thank you.
This concludes today's conference call. Thank you for joining. You may now disconnect.
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