CareTrust REIT: Solid Operational Performance, But I Don't Like The Capital Structure

Core Viewpoint - CareTrust REIT is a triple net lease healthcare REIT focused on Skilled Nursing facilities, with a conservative capital structure and flat year-over-year financial performance in Q1 2024, leading to a neutral outlook on shares [2][22]. Company Overview - CareTrust REIT primarily invests in Skilled Nursing facilities (70% of the portfolio), Multi-Service Campus (22%), and Seniors Housing (8%) [2]. - The company has significant geographic exposure to the Sun Belt region, with California (28% of revenue) and Texas (19%) being the largest contributors [2]. Financial Performance - CareTrust reported a normalized FFO of $0.35/share, flat year-over-year, and a normalized FAD of $0.37/share, also flat year-over-year [2]. - The company has slightly reduced its 2024 guidance to a normalized FFO of approximately $1.42-$1.44/share, up 1% year-over-year, and a normalized FAD of approximately $1.46-$1.48, down 1% year-over-year [7]. Investment Strategy - CareTrust has allocated approximately $386 million for acquisitions and loan/preferred equity financing in 2024, with an average stabilized yield of 10.24% [10]. - The company maintains a conservative capital structure with only $149 million in net debt at the end of Q1 2024, representing just 4% of its enterprise value [8]. Market Position - CareTrust REIT has outperformed the Vanguard Real Estate Index Fund ETF (VNQ) in 2024, delivering a low double-digit return [4]. - The stock currently trades at a market-implied cap rate of about 6.1%, which is considered not particularly exciting given the low leverage of 9% of enterprise value [12][17]. Tenant Exposure - During Q1 2024, 98% of rent and interest was collected on time, with a projected 1.5-2% uncollected rent for the full year [19]. - The Ensign Group represents 32% of all rents, indicating significant tenant exposure [20]. Coverage Metrics - Coverage metrics such as EBITDAR and EBITDARM are well above one, showing strong rent payment coverage despite weaker performance from smaller tenants [21].