Thank you for standing by. My name is Mandeep, and I will be your conference operator today. At this time, I would like to welcome everyone to CareTrust REIT Second Quarter 2024 Operating Results. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Lauren Beale, Senior Vice President and Controller. Please go ahead.

Thanks, Mark, and welcome to CareTrust REIT's second quarter 2024 earnings call. We will make forward-looking statements made on today's call are based on management's current expectations, including statements regarding future financial performance, dividends, acquisitions, investments, financings, 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 SEC. We do not undertake duty 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 FAD. A reconciliation of these measures to the most comparable GAAP financial measures is available in our earnings press release and Q2 2024 non-GAAP reconciliation that are available on the investor relations section of CareTrust 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; and Bill Wagner, Chief Financial Officer; our Chief Investment Officer James Callister, Chief Investment Officer. I'll now turn the call over to Dave Sedgwick, CareTrust REIT’s President and CEO. Dave?

Well, hello everybody, and thank you for joining us. I'm very pleased with the strong first half of the year, particularly as we celebrated our 10-year anniversary this summer with some record performance. I'll speak first to our year-to-date results and outlook for the second half of the year. James will cover the investment landscape and Bill will review the quarter. Thus far in 2024, we have delivered the following: record setting investments of approximately $765 million at an average yield of 9.5% and counting. Equity issuance of approximately 23.7 million shares for gross proceeds of $580 million. Year-over-year market cap growth of 84% and an enterprise value of $4 billion for the first time. What's just as remarkable as the growth this year is the genuine sense that the momentum is actually building. Funding this growth with equity has not only been more accretive than it would have been with the debt this year, but it has continued to set up the company for supercharged growth for the foreseeable future. The first half performance is a result of moves made in recent years to our balance sheet, our team and strategic investments and relationships that taken together have all positioned us to capitalize on opportunities as crosswinds have turned into tailwinds. In our June investor deck, I wrote about our articles of faith. First, the long term thinking, the price we pay and the operator we choose is intended to result in long term quality care and as a result value creation. We do not live for the quarter. Second, operator first, the most critical decision for any investment is matching the right operator with the right opportunity. Third, scale will come. We're not interested in growth for growth sake. Each investment should stand on its own and fourth,…

Thanks, Dave. Let me just briefly provide an update on the investment environment and on our current pipeline. During Q2, we closed approximately $268 million of investments at an estimated stabilized yield of 9.9%. These investments included the expansion of our relationship with an existing operator, Bayshire, through the $61 million acquisition of three California campus facilities, as well as the start of a new operator relationship with YAD Healthcare in connection with our $81 million, acquisition of five skilled nursing facilities in the Carolinas. During the quarter, we also closed two mortgage loans. The first was a $27 million loan to the buyer of 2 skilled nursing facilities in Tennessee leased to affiliates of the Ensign Group. Starting in year four of that loan, CareFirst has a purchase option to acquire the facilities. We also funded $90 million of a $165 million mortgage loan and a $9 million preferred equity investment in connection with the borrower's acquisition of 8 skilled nursing facilities in the Southeast. Since quarter end, we exercised our call right on the remaining $75 million. Yesterday, we also announced that we closed on the $260 million mortgage loan and $43 million preferred equity investment in connection with the borrower's acquisition of the Prestige portfolio of 37 skilled nursing and assisted living facilities to be operated by affiliates of The PAX Group. Now, turning to the investment environment. The skilled nursing pipeline continues to reload from a steady flow of interesting and actionable opportunities coming across the desk. Competition for skilled nursing acquisitions is high as ongoing improvement in post COVID performance has resulted in more facilities approaching or returning to stabilization and thus pricing on acquisition targets has increased to some degree, but has been held in check by the current capital market environment while valuations…

Thanks, James. For the quarter, normalized FFO increased 52% over the prior year quarter to $52 million normalized FAD increased 49.5% to $54 million. On a per share basis, normalized FFO increased $0.01 to $0.36 per share and normalized FAD also increased $0.01 to $0.37 per share, and again this quarter because of our replenishing robust pipeline, we continue to take advantage of our ATM and issued $306.5 million of equity under the ATM during the second quarter resulting in us having $495 million of cash on the balance sheet at quarter end. Since quarter end, we have used roughly $380 million for investments leaving us with approximately $100 million as we sit here today. In yesterday's press release, we updated and raised our guidance for this year from normalized FFO per share of a $1.42 to a $1.44 to a new range of a $1.46 to a $1.48 and for normalized FAD per share from a $1.46 to a $1.48 to a new range of $1.50 to $1.52. This guidance includes all investments made to date, a diluted weighted average share count of 146.9 million shares and also relies on the following assumptions. One, no additional investments nor any further debt or equity issuances this year. Two, CPI rent escalations of 2.5%. Our total cash rental revenues for the year are projected to be approximately $212 million to $213 million. We've eliminated the reserve discussion going forward as the properties that were making up the reserve are set to be sold and we don't have any revenue in guidance for them. Not included in this number is the amortization of below market lease intangible that will total about $2.3 million but this will be in rental revenue number as required by GAAP. Three, interest income of approximately $61 million.…

Well, thank you guys. Let me conclude the call with three things. Frist, our year to date investments equal approximately 3.5 times our life to date average annual growth rate and we're not finished with this year. Second, we have a balance sheet that provides enormous flexibility and historic capacity for both the near term and midterm, and third, we are at the start of demographic tailwinds that should last for decades to come. We hope our reports been helpful and thank you for your continued support. Happy to now take some questions.

Thank you. [Operator Instructions]. Our first question comes from the line of Jonathan Hughes with Raymond James. Please go ahead.

Hey, good morning out there. Thanks for the prepared remarks and commentary and it's been great to see the success over the past 10 years. I asked this on the last call, but James was not available to answer. So I'll ask it again to hopefully hear the perspective from his mouth, but the expectations are very high for continued acquisition activity given the leverage profile and with that comes pressure to get deals done and what I think I heard you say is becoming a more competitive acquisition environment. Can you talk about how you manage to balance those expectations for continued investment activity while maintaining underwriting discipline.

Yeah. Sure, Jonathan. Thanks for the question. I think, we really continue what we've been doing, which is we're focusing on relationships, we're focusing on finding the right operators, and we're finding on we're, you know, focusing on developing more avenues where pipeline deals can come to us and so I think as we continue to expand on the relationships that we've forged, as we continue lending with a purpose, as we continue to, you know, be seen as a creative, flexible transaction partner with high certainty of closing that, you know, opportunities will continue to present themselves both traditionally through the broker community, but also organically through existing operators, joint venture partners, and relationships we've worked really hard to develop over the past two years.

That's great. And then on the pipeline that you're looking at today, what percentage of that would be from existing relationships? What would be new? I think you mentioned there were some potential new relationships. I didn't I wasn't clear if that was in the pipeline or like the larger deals that would not be included in the pipeline.

A little of both. I think what you have in the pipe today is it is a couple that would be new relationships for us, and a couple that would be, existing longer term relationships for us. I would say pipe consists of pretty exclusively skilled nursing right now, but it's a mix between new operators and current, and it's a mix of deal source from some from brokers, some from existing operators, some from relationships we've done deals within the last 12 months. Little bit of all of that.

Yes. Okay. Last one for me, maybe for Bill or Dave, but can you talk about that leverage target range of four to five times? You did say that's still the target, but I think we've only been within that range a few times in the past five years and of course with lower leverage does come a better equity multiple, but as we think about earnings power on a fully levered basis, should we really be thinking about that four to five times leverage range or maybe more like three to four? Just any thoughts on that. Thank you.

Well, I think you're right. We have kept it, quite a bit lower than that stated range in order to, fuel this elevated growth rate that we're experiencing right now and we'd like to keep that flexibility to take advantage of opportunities like this, but we we're not moving off of that four to five times just because, look, if we if we grow in a in a significant way, we wanna be able to have the flexibility to go up to that range again if we need to and you're right, as interest rates come down, it becomes really interesting to see what that, that accretion looks like as we're able to pull that lever a little bit more.

Thanks for the time.

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets

Please go ahead. Hey, and good morning out there. As you guys continue to make what I'll call these seed investments to some extent in loans like you did early in Q3. I guess what sort of the multiplier effect or how much beyond those dollars invested would you expect to do in future real estate investment to justify moving forward with the shorter term loan investments?

Well, it's hard to put a concrete number on it, when we started this strategy of loaning with this purpose in mind of multiplying and creating a pipeline of acquisitions from it. What I could tell you is it has -- we've received a return on that strategy and investment far quicker and larger than I would have suspected when we started a couple of years ago. We have a few -- I mean, if you look at what we've closed this year and what's in the pipe, you know, it's north of $300 million of acquisitions that have, occurred because of some of those relationships and loans that we've made and so as long as we stick to that discipline, I'm not just filling a void or putting money out to do it in a short term basis, but there's at least a handshake deal and sometimes a contractual obligation for a real estate acquisition from it, we're going to continue to be open to that.

I appreciate the thoughts there. And then, Dave, you kind of highlighted the additional disposition you teed up this quarter, seems like a specific situation. I guess given the volume of investment opportunities in front of you, could we see capital recycling become a bigger piece of future funding for new investments just to enhance overall portfolio quality, credit quality, and just kind of in a normal portfolio management discipline?

Yeah, I think there's it's fair to expect there to be a little bit of that on a routine regular basis, but nothing significant or sizable. I wouldn't expect going forward. We certainly don't need the proceeds of that to fund growth. It's very specific to particular assets and operators and like I said in my remarks, it's a really small, manageable, piece of the portfolio. It's not gonna be anything more than that as we sit here today.

And then just from a timing perspective, the Midwest operator certainly that one's kind of been drilled out a little bit longer than probably you had anticipated for these, you know, assets you just added to the pool this quarter, any sense on timing of when you'd expect to transact?

Well, you're right. Some things are taking longer than I would expect and so I'm a little bit hesitant to predict but I'm hopeful that we'll have this transition and disposition work done, by the end of the year.

Thanks for the time.

Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.

Yes, thanks. James, can you provide some color on what is CareTrust's current underwriting standards, when you're pursuing new deals? And how have these standards changed over the past, eight months? I mean, obviously, interest rates have come down, competition has picked up. I mean, so how are you looking at transactions a little bit differently today than maybe you were at the start of the year?

I don’t think we look at them too awfully different. Mike, I think that we're gonna still really shoot to try to get, you know, one four coverage and on skilled nursing, you know, a yield that is at least in the nines. That's what we're gonna continue to shoot for. I think what has maybe changed, call it, in the last few years is that as we find opportunities that are on the path back to being stable, but are not there, I think there is an enhanced collaborative process with tenants to really underwrite carefully what we think stabilized coverage is going to be at those facilities and how the operator is going to be able to get there and really make sure that we and the tenant are comfortable with the assumptions we're making and that we see the right metrics and indicators for getting back to a one four type coverage in our typical yield range. So I think that you don't see as much stabilize still yet as maybe years and past, but I think we've gotten better at working with tenants to enhance that underwriting process of how long the turn takes and when they get there.

Okay. And where are cap rates today? I know you said in your prepared remarks they're still within historical ranges. There's a couple of large debt deals that you announced, I guess, post quarter end that was at 7.9 and 8.5. And I guess what's the reason that you're willing to go below nine for those transactions? Is it just because that there are larger type transactions? And are you willing to go a little bit lower on the debt side? I guess, how should we think about that?

I think we're willing to go a little lower anytime the deal is, you know, sizable and bigger and competitive and I think also, Mike, as we do bigger deals, we wanna create a sustainable rent or interest stream and if we take a little hit on yield for more comfort on coverage, we're gonna make that trade more often than not, especially on larger deals. I think that's kinda what you see with the loan yesterday and the loan in June is that exact approach.

Okay. And I don't know if you can talk too much about the Prestige transaction, but I guess what were the give and takes on doing that as a mortgage versus buying some of the real estate and then also kind of the addition of the preferred with the operator? I mean, how do you think about creating that type of transaction utilizing, I guess, different levers?

Yeah. I mean, I'd say, look, when we looked at it, you know, from, you know, thinking of whether it would work from an acquisition perspective, when we tried the opportunity to next take, we gotta take our spots and we felt like doing it completely on our own. We were gonna it's a tough solve and we're gonna have difficulty unlocking the value of some of the assets, including particular, the 15 leasehold assets that are with 3rd party landlords. So, we liked better the profile of aligning the borrower and operator who both put equity into the real estate side of the deal. We like that we still got over $40 million of essentially, you know, for us, real estate equity in the in the prep we put out and so on that in particular deal, we felt like the loan made more sense and was a better, you know, structure for us. But we look at each deal individually, you know, and our preference is always gonna be to acquire, but sometimes we pick our spots and see a different alignment structure may fit what we're looking to do better and that was the case with Prestige.

Okay. Great. Thanks.

Our next question comes from the line of Juan Sanabria with - BMO Capital Markets. Please go ahead.

Hi, thanks for the time. Just curious on the $270 million pipeline, the mix between fee simple loans and how should we think about the blended year yield there given you mentioned increased competition?

You mean on the loan itself, Juan, the one we announced yesterday?

No. So for the pipeline, the $270 million what are the yield expectations given higher competition level?

Oh. And then the next Yeah. So Simple and low. It's all skilled nursing, and I would say that the yields are still where they've been for us. I mean, it's gonna be more likely than not in the nines. We push it where we can, where coverage seems like it's gonna fit for that deal, but I think what you see in the pipe right now is, you know, right in the sweet spot of where we've been, which is in the mid nines.

Just to just to clarify, there's no loans, in that $270 million pipe that we've quoted. It's just a few simple acquisitions dismiss.

Okay. And then how should we think about the remaining dispositions and repositioning that are left to be done hopefully by year end in terms of any offsetting dilution to the sort of the current run rate?

No, I think in guidance, we're not expecting any income from any of those facilities that are being transitioned or sold. So anything that we're able to transition and then recycle is gonna be accretive next year for us.

Okay. That's it for me. Thank you very much. Oh, one more. Bill, can you, clarify or comment if there's been any ATM activity quarter-to-date?

There has not been any ATM activity quarter to date subsequent to the quarter, mostly because we've been in a blackout.

Fair enough. Thank you.

Our next question comes from the line of John Pinkowski with Wells Fargo. Please go ahead.

Thank you. It looks like you've transitioned a few assets to held for sale, and we know there's been some operators you've been patient with. Are you getting to the point where you're more likely to transition those out and then, you know, what's the impact to guide there?

Yeah. That's exactly right. That we have gone from being patient to acting on those to make a change and so, effect like I said in my prepared remarks, all the transitions that are ongoing and the dispositions, that we've announced effectively deal with all of the underpayments for this year. So once that's all complete, as we, as we get new rents from the transition to assets, that'll be additive to next year, and then we'll be able to recycle those other assets into new acquisitions.

Got it. And then maybe jumping to this morning's jobs report and some of the discussions we've heard about a softening labor environment. How has that started to flow through, if at all, to your tenants? Are you seeing any improvement in your ability to get away from the door? And do you expect that to translate to better coverage?

Yeah. We do. We are seeing and hearing from our operators that the labor environment is normalizing. In our portfolio alone, we've seen agency expense drop 35% in the last year from year over year. So that's a good trend. There's still some agency fat in the portfolio. So there's some tailwind there for us as that continues to normalize.

Got it. Thank you.

Our next question comes from the line of Rich Anderson with Wedbush. Please go ahead.

Thanks. Question back on the disposition. If I missed it, I apologize, but do you have an idea of what type of volume we could be talking about to sort of eliminate your problem children in the portfolio?

Volume in terms of number of assets?

Dollars.

No. I mean, my hesitation in answering that is that when assets are on the market, we were a little reluctant to talk openly about pricing expectations and what we would expect to receive. Just we don't want to tip our hand too much to the market, but there is information in the queue about what we've done in terms of impairments, and you can kind of put some things together there.

Okay. In terms of the balance sheet, your non-existent leverage ratio, Is the method to really use that in this environment even though we're seeing interest rates come down now, but still high relative probably to recent norms. Is the method to have some room to inherit reasonably priced debt if you were to go and buy something of size and then you can kind of fold that into your balance sheet that way? Is that the only kind of way you could see anytime soon getting up to your 4.5 type of leverage ratio?

Hey, Rich, it's Bill. The only way over call it the next 12 months that I see us getting that getting the leverage back up to our stated range would be some serious investment flow. So I don't think it's realistic that in the next 12 months we'll get up there but having leverage so low right now does allow for us the optionality of assuming debt on larger transactions, as well as utilizing the revolver when interest rates come down.

Do you have a sense of how much earnings you're leaving off the table because of your leverage profile and one would think that if you had more leverage, you'd have more earnings?

No, I don't think so right now because of the price, given where rates are at relative to the price of equity, I don't think we're leaving, I don't think we're losing anything there. I think the outlook is where we'll see, as Dave said in his prepared remarks is some supercharged growth when rates come down and we have to tap that lever, the debt lever to really see it.

Yes. High class problem. Last question, CMS, you mentioned 4.2% for FY 2025. I actually think that was revised up from the original proposal, a bit but do you think that this is it, the last year, 2025, of this sort of elevated number as it relates to recapture of inflation and all that sort of stuff? Do we start to trend back down to a more typical 2% type of growth rate in fiscal 2026? I'm just curious your thoughts there. Thanks.

Well, thanks. I'd like to phone a friend on that one and call folks at AHCA to confirm or deny what I'm about to say. So with that disclaimer, I think that we're not quite back yet to getting -- I don't think we've outrun the inflationary effects on the math because the Medicare and Medicaid rates depend on the state. There's a couple years of lag, that that is going into that math. So the rate increase that we're getting for fiscal year 2025 isn't really based on 2024 inflation on the labor. It's actually further back than that and so I think that we still might have a little bit more of a elevated rate increase profile going forward but, that's like I said, I could be wrong, but I think that's my take on it.

Okay. Sounds good. Thanks very much.

Our next question comes from the line of Alec Feygin with Baird. Please go ahead.

Hi. Thanks for taking my question. First one for me is, is there a limit on how big the loan book can get anything in the covenants or internal to the company?

No, I don't think we're going to bump up against any covenants anytime soon. We care about it. We look at it. But the tolerance that we have for it is really connected, like I said earlier, to the expected off market acquisitions that it brings. Virtually, all of the acquisitions that that strategy has brought have been off market deals that we would not have otherwise seen.

Yeah. Makes sense. Kind of switching to the tenant watch list, is there, any difference quarter over quarter in, operators who are on that watch list?

No.

Got it. And what drove the $25 million impairment? Was there operator specific or real estate specific?

Yeah. It was classifying a number of assets as held for sale.

Got it. That's it for me. Thank you.

That concludes our Q and A session. I'll now turn the call back over to Dave Sedgwick for closing remarks.

Well, guys, really appreciate your time and your interest. Again, just want to thank the CareTrust team for an extraordinary year to date and really excited to see how the second half of the year shapes up and setting up for an amazing 2025. Have a great weekend everybody.

This concludes today's call. [Operator Closing Remarks].