2023-05-02 10:49:05 ET
Summary
- The management has been patiently and steadily acquiring new properties and has taken a proactive approach to shifting the portfolio away from senior housing.
- The company will likely grow at 3-5% AFFO per year in the next 5 years allowing it to outperform its peers once again.
- The management’s dividend policy focuses on stable, reliable, and growing dividends.
- CTRE is trading at a 5.7% dividend yield.
Investment thesis
CareTrust REIT, Inc. ( CTRE ) is the 11 th largest among the 17 publicly traded healthcare REITs. The management has been actively changing the portfolio and moving away from senior housing to skilled nursing and multi-service campus segments. The company has great occupancy and rent collection rates, and the management’s dividend policy provided investors with reliable dividends for the past 8 years. In addition, the current 5.7% forward dividend yield presents a great buying opportunity with an attractive valuation for long-term income investors.
Portfolio changes in recent years
CareTrust is a self-managed public real estate investment trust that specializes in the ownership, development, acquisition, and; leasing of senior housing and healthcare-related properties. CareTrust REIT obtains its income primarily from leasing estates to various senior housing operators, healthcare services providers, and other health-related organizations. These renters come from a wide range of local, regional, and national businesses. The company has grown its real estate portfolio from 149 properties in 2016 to 204 net-leased healthcare properties across 23 states by 2023 .
The management has started to shift the portfolio to skilled nursing and multi-service campus segments from senior housing. This shift has not started lately but accelerated in the past year. In 2016 approximately 18% of the total rent came from senior housing and by 2019 it has declined to 15%. By the end of 2022 the senior housing income has dropped to 8.1% and skilled nursing went up to almost 75% from 69% in 2016. But most of the senior housing income has been picked up by the multi-service campus segment which has grown from 12-13% in 2017-2018 to 17.5% by the end of the fourth quarter of 2022. The lion’s share of its lease maturities are not due until 2031 and thereafter so its tenant base and future income stream can be considered safe.
However, one of the risks is the lack of tenant diversification. The top 5 tenants are responsible for 70% of CTRE’s total income. This risk has been the same in the past 8 years, only the percentage of the share changed. In some years this share was above 85% (2016), in some years it was below 67% (2019) now it stands at 70.3%. So investors who are looking for a very widely diversified healthcare tenant portfolio might pass on CTRE but I think the management has proven its business model over the last almost 10 years.
Valuation
CTRE has been at the forefront of REITs when it comes to balance sheets; its net debt to annualized EBITDA ratio of 3.7x is notably below the 6.0x level generally considered safe for REITs. For the full year of 2022, CTRE's rent collection rate was an impressive 95.2%. Its net debt for enterprise value is around 30% which gives CTRE a high safety score. In addition, CTRE has a large source of liquidity, amounting to a bit less than $400 million through their revolving credit line and an additional $20 million in cash. CTRE is trading at 2.3x its book value which could seem high but looking back to the past 5 years the average P/B ratio was around 2.2-2.4x. Analysts estimate a 3.6- 5% AFFO growth per year in the next 3-5 years, no wonder why the company has outperformed almost all of its peers in the last years and will likely keep up this pace.
Dividend
In March the company raised its quarterly dividend by 1.8% to $0.28 per share. The company has been a stable and reliable dividend payer; it has an 8-year consecutive dividend-raising streak. Since its IPO it has been paying and raising its dividend every single year. The management has not made any comments on dividends for quite a while, so it seems to me that the dividend policy remains the same as previously: providing a reliable and growing dividend to shareholders. The company also has a great dividend yield party due to the recent increase. It is trading at 5.71% which stands relatively high based on the past 5 years. Income investors can get a great long-term deal with the current dividend yield.
Final thoughts
Income investors who want to get exposure to the healthcare REIT sector should look no further. CTRE can provide a stable and secure dividend, a slow but steady growth of its investment portfolio combined with enough excess liquidity, and a solid balance sheet. Its 5.7% dividend yield presents an attractive buying opportunity for long-term income-seeking investors.
For further details see:
CareTrust REIT: Great Company For Income Investors