CareTrust REIT: 4.7% Yield And Long-Term Growth Potential (NYSE:CTRE)

CareTrust REIT, Inc. (NYSE:CTRE) is a well-managed healthcare real estate investment trust with a primary focus on senior facilities that support the needs of the elderly.

The healthcare trust owns a large portfolio consisting of Skilled Nursing facilities and profits from key aging trends in the United States that will drive up demand for senior-focused healthcare properties in the long run.

CareTrust REIT does have a bit of outsized dependence on one operator, but the trust’s EBITDA/FFO growth and low normalized FFO payout ratio are top reasons to consider the stock for a passive income portfolio. The stock also pays a nice 4.7% yield and CareTrust REIT is growing its dividend.

A Senior-Focused Healthcare REIT

CareTrust REIT owns close to $2.0 billion worth of properties in its healthcare-focused investment portfolio. Mostly, these assets include Skilled Nursing facilities (72%), campus facilities (20%), and senior housing (9%) that produced $201.7 million in quarterly rent in 4Q-23. The biggest investment for CareTrust REIT, from a rent collection angle, is Skilled Nursing Facilities, which accounted for 73% of all rent in the fourth quarter.

The trust is present in 25 states and owns a large number of healthcare properties in the California and Texas markets. The asset map below shows CareTrust REIT’s revenue percentages as they are derived from the highlighted states.

The trust fundamentally profits from a number of trends in the United States that provide support not just to CareTrust REIT, but to all healthcare REITs that cater to seniors. For one, healthcare expenditures are broadly rising and two, the U.S. population is aging rapidly, leading to strong growth in the 65 and older age groups that are the primary customers of Senior Living and Skilled Nursing facilities.

Strong Underlying EBITDA, Funds From Operations

CareTrust REIT’s portfolio has long-term upside in EBITDA and FFO simply because of the secular demand drivers that I touched upon in the previous section. The trust’s senior-focused healthcare real estate portfolio produced 11% EBITDA growth in the last year, based on CareTrust REIT’s 4Q-23 numbers, and 17% growth in normalized FFO.

As I will discuss in a later section in this article, CareTrust REIT’s low FFO-based payout ratio is a strong reason for passive income investors to consider buying into the healthcare trust.

Rent Diversification And Associated Problems

Healthcare REITs are real estate owners and landlords and the FFO potential of their real estate portfolios depends on the underlying profitability of a small group of operators. These operators are paying rent and mortgage interest to their REIT landlords, which is used to pay shareholders their dividends.

Thus, a high concentration in the operator portfolio, which is the case for CareTrust REIT, is a potential problem for investors if one operator (or more than one) runs into payment issues. Medical Properties Trust, Inc. (MPW) comes to mind as an example where this lesson has come home to roost.

In the case of CareTrust REIT, the largest operator is The Ensign Group (ENSG), which leases 98 facilities, and which is responsible for a very large 34% portion of the trust’s rent as of 4Q-23. Though the remaining portfolio is rather well-diversified, the stark operator concentration with Ensign is a bit of a drawback, and it could pose a cash flow and dividend coverage risk for CareTrust REIT should this specific operator run into trouble.

Dividend Coverage And Implied Growth Potential

CareTrust REIT is providing passive income investors with an exceptionally stable dividend payout ratio backed by normalized FFO.

CareTrust earned $1.41 per share in normalized FFO in the last twelve months while paying out a total of $1.12 per share in dividends, leading to a dividend payout ratio of 79%.

Omega Healthcare Investors, Inc. (OHI), for which I provide continuous coverage as well and which also has investments in the skilled nursing market, has an FFO payout ratio exceeding 90%.

Taking into account that CareTrust REIT both has a lower payout ratio and a growing dividend compared to Omega Healthcare Investors, I think that CareTrust REIT is the safer investment for passive income investment that looks to invest in the skilled nursing sector.

CareTrust REIT’s payout metrics in 2023 prove that the dividend has been well-covered by FFO and that a reasonable margin of safety is provided. Of course, this implies attractive dividend growth potential for passive income investor in 2024.

FFO Multiple

CareTrust REIT earned $0.36 per share in normalized FFO in 4Q-23, reflecting a run-rate (leading) FFO level of $1.44 per share. Let’s assume, for conservative planning purposes, that CareTrust REIT will not grow its normalized FFO in any meaningful way in 2024. Based on a stock price of $24.17, the trust’s stock is selling for 16.8x FFO estimated for 2024.

Omega Healthcare Investors, which has a higher payout ratio (above 90%) and also operator payment issues that have caused concerns over the trust’s dividend sustainability, is valued at 11.4x FFO. Though CareTrust REIT is more expensive, the dividend is growing (as opposed to Omega Healthcare Investors’) and the payout is safer.

Operator-Specific Risks

I already alluded to the high degree of operator concentration in CareTrust REIT’s portfolio. The REIT presently has no major operator issues, but there is a risk that the healthcare trust could take a big hit to its FFO should something happen to Ensign, the largest operator in the mix.

Thus, CareTrust REIT would be well advised to take strategic steps to diversify its operator mix and reduce the sales percentage it derives from this particular operator.

My Conclusion

CareTrust REIT is a growing healthcare trust with a focus on Skilled Nursing and Senior Living facilities. Therefore, the trust profits from underlying aging trends in the United States as well as a growing share of old people poised to rely on such facilities in the coming decades.

The underlying growth trends favor an investment in CareTrust REIT and support demand for the REIT’s facilities in the long term.

CareTrust REIT also offers passive income investors a well-covered 4.7% yield as well as a growing dividend, which makes the trust a promising long-term income bet for REIT investors. Buy.