Operator
Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Care Trust Street first quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Lauren Beal, Chief Accounting Officer. Please go ahead.
Thank you and welcome to CareTrust Reef's first quarter 2025 earnings call. We will make forward-looking statements today based on management's current expectations, including statements regarding future financial performance, dividends, acquisitions, investments, financing plans, 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'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 EBITDA, FFO, and FAD, or FAB. A reconciliation of these measures to the most comparable GAAP financial measures is available in our earnings press release and Q1 2025 non-GAAP reconciliation that are available on the Investor Relations section of CareTrust website at www.caretrustreate.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 bill wagner chief financial officer and james collister chief investment officer i'll now turn the call over to dave sedgwick care trust reeds president and ceo dave thank you lauren good morning everyone and thank you for joining us let me begin with our pending strategic acquisition of the london stock exchange listed company care read on march 11th we announced that our offer was unanimously accepted and recommended by CARE REIT's board. The voting deadline was last Friday, April 25th, and I'm thrilled to announce that their shareholders have approved the deal. We expect to officially close on the acquisition next Friday, May 9th. Based on Wednesday's sterling dollar exchange rate and excluding transaction costs, at 108 pence per share, the deal has a purchase price of approximately 856 million dollars and the portfolio as of the end of last year has contractual rent of approximately 68.6 million the acquisition of carrie marks our first m a activity our entry into the uk and the largest deal in our history so some context last year was truly an extraordinary year for care trusts. At the beginning of 2024, we thought that we had a chance to possibly double the highest single year record of investments in our history. But about midway through the year, we started to see a path to more than quadruple that record. So you saw a rapid cadence of deploying capital, issuing equity, and reloading the pipeline on repeat throughout the year. The flywheel and the entire team ran hot and fast, so much so that we really wrestled with the following question. If it ain't broke, why fix it? Why look at shop? Why look at the UK? These are all really fair questions that we took seriously. So why the UK's strategic acquisition of Care REIT and why now? Let me tell you why. First, this deal diversifies our business in terms of operator concentration, geography, payer sources, and asset classes, bringing our U.S. skilled nursing concentration down to approximately 49% by property count and 63% by rental income. Second, in addition to adding CARE REIT's 134 properties across 15 operators generating 68.6 million of new annual rents, that is covered by more than two times on an EBIT arm basis the deal also adds to us an experienced uk-based investment asset management and accounting team who are hungry to grow again third the purchase price represents a significant discount to replacement cost and will be accretive in year one finally and essentially the deal adds a new growth engine for care trust for years to come so when you look at that rationale along with our cost of capital, our balance sheet, the strong demographics and supply demand tailwinds behind our sectors here in the U.S. and in the U.K., and you combine all of that with a care trust team and culture that continues to get stronger every year, we began to reframe the question of if it ain't broke. We began to believe that because it ain't broke, we have a unique window of opportunity to do something special immediately after last year's exponential growth. We've invested throughout the organization to ensure that the flywheel in the United States does not slow down and that the U.K. will be additive to our current robust U.S. growth engine. James will share with you now color on the deals closed in Q1 and the reloaded pipeline of U.S. deals, along with some insights into our outlook for U.K. growth. James.
During the first quarter, we completed three new investments totaling over $47 million at a yield of approximately 10%. These investments included a skilled nursing facility, a senior's housing facility, and a mezzanine loan related to the acquisition of a skilled nursing portfolio. On April 1st, we also closed on the acquisition of a skilled nursing and assisted living campus in Southern California. The acquisition was completed through a joint venture arrangement pursuant to which the company provided a combined common and preferred equity investment, totaling approximately $34 million at an initial contractual yield of approximately 9.7%. The joint venture has leased the facility to affiliates of the Ensign Group pursuant to a new 15-year triple net lease that includes two five-year extension options and annual CPI-based escalators. This transaction brings our year-to-date investment total to approximately $82 million at a yield of approximately 10%. As we look forward, our investment pipeline remains strong. The reloaded pipe today sits at approximately $500 million and consists predominantly of real estate acquisitions. The quoted pipeline includes some singles and doubles, as well as some mid- to large-sized portfolio transactions. Our quoted pipeline does not include the recently announced UK acquisition of Care REIT, nor does it include a couple of larger portfolio opportunities that we continue to review. The pipeline primarily consists of skilled nursing facilities, but also includes some senior housing opportunities. And please remember that when we quote our pipe, we only quote deals that we have a reasonable level of confidence that we can lock them up and close within the next 12 months. We also continue to look at a healthy flow of inbound marketed opportunities, as well as off-market opportunities brought to us by existing operators and other relationships. Deals coming across our desk include a consistent flow of both skilled nursing and seniors' housing opportunities, and we are seeing a moderate but notable increase in the number of marketed and off-market large portfolio deals on both fronts. Turning to our pending acquisition of Care Read, we are very excited about the immediate and long-term benefits of these assets and about utilizing the talented, seasoned team there, as well as our own experience and relationships to expand the UK portfolio this year and beyond. We are actively reviewing acquisition opportunities in the UK and continue to meet with existing and new operators eager for a capital partner like CareTrust to take advantage of a compelling operating environment. We feel that UK care home investment opportunities provide an additional pipeline of accretive acquisitions where we are uniquely positioned to win deals with our competitive advantages of deep underwriting and operating experience, pristine balance sheet, access to and cost of capital and certainty of closing. And while we are keen to find and close on UK acquisitions and as evidenced by our reloaded investment pipe, we are careful to not let those efforts slow the pace of our primary focus of sourcing and executing on accretive real estate acquisition opportunities here in the U.S. With that, I'll turn it over to Bill.
Thanks, James. For the quarter, normalized FFO increased 67.4% over the prior year quarter to $77.8 million and normalized FAD increased by 66% to $80.8 million. On a per share basis, normalized FFO increased 7 cents or 20% to $0.42 per share. Normalized FAD increased 6 cents or 16.2% to $0.43 per share. During the first quarter and in conjunction with the UK transaction, we were required to put cash into escrow in order to evidence sufficient funds to cover our acquisition of Care REIT shares in anticipation of shareholder approval of the transaction. The deposit of cash into escrow was made primarily through a draw on our revolver. In addition to acquiring Care REIT's issued shares using the cash held in escrow, we intend to assume Care REIT's existing debt, which was approximately $259 million as of year end. We expect to refinance that debt subsequent to the transaction closing with a portion of the proceeds from a $500 million five-year term loan from our bank group that we expect to close this month subject to ordinary closing conditions. The excess cash from the term loan would also help fund our $500 million pipeline. In yesterday's press release, we raised guidance for this year with normalized FFO per share of $1.69 to $1.73 and for normalized FAD per share of $1.73 to $1.77. This guidance includes all investments closed to date, a diluted weighted average share count of 190.6 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 two and a half percent our total cash rental revenues for the year are projected to be approximately 284 million not included in this number is the amortization of lease intangibles that will total about 3.5 million but this will be in the rental revenue number as required by gap three interest income from financing receivables of eleven and a half million. Included in this number is $9 million of cash and $2.5 million of non-cash revenue for GAAP purposes that is subtracted in the FAD reconciliation. Four, interest income of approximately $90 million. The $90 million is made up of $76 million from our loan portfolio and $14 million from cash invested and money market funds. The $6 million increase from last quarter in interest income is from the cash held in the escrow account for funds needed to close the UK transaction. Five, interest expense of approximately $24.3 million up from $21.3 million in last quarter's guidance due to the line draw for the escrow account related to the UK transaction. Interest expense also includes roughly $4 million of amortization of deferred financing fees. and six, G&A expense of approximately $33 to $37 million and includes about $11.7 million of deferred stock comps. We plan on updating this guidance again once the UK transaction closes. Lastly, our liquidity continues to remain strong. Subsequent quarter end, we raised roughly $100 million via the ATM and used $50 million of that to pay down the revolver to $375 million. In addition to $45 million of cash on hand, we have $825 million available under our revolver, and we are extremely thankful for our tremendous bank group in backing us on a $500 million term loan that we have commitments for and expect to close this month. Leverage continues at a historic lows with net debt to normalized diva dollar ratio of 0.5 times. Our net debt to enterprise value was 2.9% as of quarter end, and we achieved a fixed charge covered ratio of 15.2 times. After the UK transaction closes, we expect our net debt to annualize, normalize the E-to-Bow ratio to be below 2.5 times, which is still well below our target range of four to five And with that, I'll turn it back to Dave.
Thank you both. We hope that our report has been helpful, and thank you for your interest and support. We're happy to take any questions you might have.
Operator
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Carol Grannis with Bank of America. Your line is open.
Hi, good afternoon. This is Carol Grannis. Thank you for taking my question. My first one is, can you please make some comments on possible expectations with the general macro, specifically with policy and provider taxes, and the impacts of that could flow through to your portfolio?
Hey, Farrell, yeah, there's really no real change in our outlook from our last call on potential Medicaid cuts. I think along with everyone else, we're just monitoring the process, and it's unfortunately too soon to be definitive on this one way or the other. So, you know, there continues to be widespread bipartisan support for Medicaid and protecting the care for seniors in nursing homes especially. so we will we will monitor the the progress in that budget process along with everyone else.
Thank you and also I was curious if you could draw a framework of what are the conditions for you to enter into a debt investment rather than portfolio or property acquisitions?
Yeah our default is of course always to prioritize acquisitions what we've been the way we've talked about debt investments over the last really a couple years is a means to an end if if we see that there's an opportunity through it alone to build a relationship that's strategic in nature because this this borrower or operator is a key relationship that we think can lead to real growth in the future, real acquisitions in the future. Then, and really only then, would we entertain a loan. So the loan book has increased quite a bit over the last couple of years, but the $1.5 billion of investments that we did last year, about half of those were tied to those strategic relationships that we made through lending in previous periods. And if you look at the $500 million of acquisitions that is largely acquisitions in our pipeline today, the vast majority of that are off-market deals that have come from those relationships that we've created from those loans.
Operator
Okay, thank you.
Operator
Your next question comes from the line of Austin Wurse Smith with KeyBank Capital Markets, Inc. Your line is open.
Great, and I hope everybody's doing well out there. My first question, just on the care retransaction, just wanted to pinpoint, I mean, Any changes to the annualized earnings or FAB accretion from the initial underwriting or initial disclosure just from, you know, either escalators that have kicked in, you know, additional synergies or just how you plan to finance the transaction?
Yeah, we will. I know that's the pressing question on everybody's mind, and we will provide answers to those questions in a little bit over a week when we announce the deal. Until then, we're still fairly limited to what we can say.
All right. That's fair. I understand. I thought that may be the case. Maybe James or Dave, could you just size up what a reasonable volume or investment pipeline we should think about for the UK market, you know, focused more on the normal course singles and doubles, and then also speak to the yields that you're seeing in that market, you know, overall? yeah i'll start and james can add some color if mine was too dull um the the pipeline there is going to take some time to catch up right to mature to the point like we have it here in the states so there are a number of um call it singles and doubles that that we're currently looking at
The range of cap rates, I think, is maybe going to be a little bit wider in the U.K. than you're used to seeing us here in the States, simply because, as you know, skilled nursing in the States, those cap rates stay fairly fixed and tight, regardless of the cycle that we're in. But in the UK, the care homes are more like a hybrid assisted living memory care with some nursing home capabilities into it. And so there's a wider range of quality and therefore cap rates too. So you might see something in the I-7s, 8s, and 9s, depending on the particulars of the deal.
That's helpful. And Austin, I just think I'd add, Austin, that look, I don't think we have a goal, just like we don't here. We approach it the same, which is we want to find the right deals and not set a goal of the number we want. But when the right deal's there, we'll try to get plucky and go get it.
That's helpful. And if I can squeeze in just one more, pivoting a little bit here, but I know we're able to look at the coverage ratios that you provide in the supplemental and looking at kind of packed things, you know, trending very well. But just speaking more broadly across the real estate as well as the other loan investments, curious for an update of how these properties are performing over the last six to nine months relative to what you initially underwrote and just wondering how you're thinking or planning for any and all outcomes as you await for them to file their financials, hopefully here sometime soon.
Yeah, thanks, Austin. And with respect to PACs, I think you were just asking specifically about them. We really don't have any comment or update besides just having the data and the coverage speak for itself at this point. We're still waiting for their release and disclosures. Good. Thanks for taking the questions.
Your next question comes from the line of Rich Anderson with Redbush Securities. your line is open thanks and good morning um so you answered the question why uk you asked yourself last year um does um does why not shop you know now take a bit more front and center with you going forward um or or do you do you feel like you're sticking to your triple net knitting for the time being and let the U.K. process sort of get folded into the business and so on? Plenty to do there.
Well, that's a great question. I think we certainly feel like there's plenty to do in the U.K. I think the benefit that we have with this particular deal is we're not having to figure things out on our own and start from here, but we have the team based in the U.K. that we can just kind of facilitate enable empower to to get back to the growth story and with respect to shop i think the the same kind of process and rationale applies we've been looking at shop like we've said for the last now a couple of years and i i think we're just looking for the right entry point there like we've like we've been looking for the right entry point
into the uk and we'll be patient and wait for the right the right deal okay um in terms of the pipeline the 500 million is that just us or does that include uk as well i'm sorry if i missed that yeah that's just us okay and so when you think about returns are they fairly on top of one another, what you see in the U.S. and what you're seeing in the U.K. in terms of, you know, cap rates and IRRs and all that?
Well, in the U.S., I think James could correct me, but I believe that most of what's in that $500 million is skilled nursing, so you're going to see a higher yield than I think what we might be looking at in the U.K., but it's still too early. We might see some deals in the U.K. in the nines. I might also see some in the eights. So I think they're all going to be accretive and fairly close to each other. But different assets and each deal will, as you know, have got to underwrite individually.
Great. Last for me, you guys were good enough to sort of dig into the whole cms uh reimbursement uh you know for for fiscal year 2026 i know the headline is 2.8 can you talk about the moving parts there and uh what what the real number is for for the way you see it today for your portfolio and and whether or not you're kind of happy with what you know what they're they're um assuming for next year or suggesting for next year you know where do you stand on that we talk a lot about medicaid but where are you on medicare thanks sure thanks rich yeah i think medicare's you know i i think the the rate increase is fine for for us
there's the headline rate but then the devil's in the details every facility is going to have its own unique increase based on different variables that go into that so you know i I think for us, as you look at it across the board, it blends to about a 2.2% across our portfolio, which, you know, of course, you'd like it to be more, but it's fine. None of our operators are concerned about that. It's kind of in line with historical increases there. Okay. Fair enough. Thanks very much. your next question comes from the line of west galliday with baird your line is open hey guys uh by doing a large deal in the uk did that put you on the map are you seeing a lot of new relationships and then we also start lending in the uk yeah west the i'd say i we put out a press release a couple of weeks ago just when we announced that our offer was best and final And what I said there is what I'll say right now, which is regardless of the outcome of the vote, we feel like we had already won because of the response from operators there and brokers. It was really overwhelming. We went out there a couple weeks ago and met with several operators, and they really are hungry to grow with us. So we think that there's going to be a great opportunity. We are not looking to lend into that market today. We're just looking to your traditional acquisitions and leases. Thank you. Yep.
Operator
Your next question comes from the line of Michael Caro with RBC Capital Markets. Your line is open.
Yeah, thanks. I just wanted to clarify on, I guess, the near-term opportunity in the UK. I know the pipeline doesn't have any UK deals. I believe, James, you kind of highlighted that it might take some time, or maybe Dave, I forget who it was, that it might take time to kind of build up that pipeline. But obviously, David, you just announced in that press release, you referenced that you're getting some reverse inquiry. So, I mean, how long does it take to start to build that pipeline over there? Can more deals happen in the back half of this year? Or does it take longer to build that out?
I would hope that we could – my hope is that we could get something done this year, but like I said, it's going to take some time because we're – the team there, while they've been there a long time, they haven't really had access to capital. And so, the existing pipeline that we're stepping into was fairly thin. And – but, you know, not to put too much pressure on James, you know, if he doesn't get something done this year, he might be – no, I'm just kidding. We'll try to get something done this year, but I think next year it would be more likely that we start to see a more mature pipeline form.
Okay, great. And then, James, can you talk a little bit about the U.S. SNF market? Has this market changed at all over the past six months or post the PAX deal? I mean, is there less capital looking for deals, or is that capital more on the sidelines, just kind of waiting to see kind of what happens with the Medicaid outlook? I mean, has the competitive landscape changed at all?
I don't think it has really at all, Mike. I think there's still the same groups, the same amount of capital out there looking at deals. I think there's just about the same deal flow out there. I think you still, if anything, some of the noise has maybe some regionals or mom and pops feeling like it's a good time to sell. So I think it's pretty unchanged.
Same pretty fierce competitive landscape, same pretty consistent buyer pool, and kind of same groups typically at the same deal table okay and then just last one i guess for a bill related to guidance i know i know you said that the the carry deal is not included in that and i believe you mentioned this when you did your your um your walkthrough but i know that you have about 600 million of cash on the balance sheet i mean did i hear that correctly just assume that is invested in like uh money market type funds within guidance that restricted cash is
invested in uh some money market accounts with the escrow agent and that's what you assumed that's in in your updated guidance range yeah that is that is included in the that that represents an increase over last quarter's guidance for interest income okay great thank you your next question comes from the line of juan sanabria with vmo capital markets your line is open hi um just curious on uh the watch list and kind of cash paying tenants how how things are trending
in your comfort level that you know there won't be any surprises as we look out for the next uh few quarters well by definition if we knew of a surprise it wouldn't be one but uh having said that we feel pretty good about the the strength of the overall portfolio as you saw and the overall coverage tick up already it was a ridiculously high coverage to begin with and it ticked up further last quarter um i think we have a pretty good handle on the folks that are not paying and we're trying to deal with those by selling or transitioning those assets. So I would be surprised if we had a surprise.
Fair enough. And then just maybe looking at the top 10 tenant list, you've got links and Champion Care that have transition assets, but how are you feeling about their trajectory and just the pace of how they're executing on the business grounds?
Yeah, that's a great question. Feeling really good about both, both on track or a little bit ahead of schedule. With Lynx, they've been in there the longest, but they also have the longest ramp of rent bumps based on their initial large deal that we did with them. So we want to just make sure that that next rent bump, you know, is fair to them before we put them in in front of everybody.
Great. And then if I could be greedy, one more question for Bill. Is the turmoil you guys are talking about with the banks, I'm assuming that that'd be multi-currency, is that correct? and do you have a sense of kind of what the cost may be in differential between the U.S. and pound interest rates?
Yes, it won't be in pounds. It's going to be an amendment to our existing credit facility, so the credit facility will go from 1.2 to 1.7. 500 million of that will be a term loan, and the pricing on the term loan will be just inside our revolver.
Operator
Before going to the next question. Again, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from the line of Omotayo Okusanya with Deutsche Bank. Your line is open.
Yes. Good afternoon. So again, rent coverage ratio is going up. It sounds like generally the health of the operators is good. Just kind of curious, you So the operators kind of access to financing at this point, you did have one of your peers this morning talk about one of their tenants having some challenges with their ABL. Curious, are you seeing any of that industry-wise at this point? And also, if there are any challenges for operators also, or even for you, as it pertains to kind of GSE financing?
No, we're not seeing anything like that. all right good to know thank you thanks tayo i will now turn the call back to dave studrick for closing remarks well again thank you very much we're as you can tell um very excited about the uh the the quick and robust start to the year and i really appreciate everybody's support have a great weekend ladies and gentlemen that concludes today's call you can now disconnect Thank you and have a great day.
