CareTrust REIT: The Next Big Healthcare Real Estate Play?

In a report issued Thursday, RBC Capital Markets analysts led by Michael Carroll and Rich Moore looked into CareTrust and concluded that the company should “drive solid earnings growth through management sourcing and completing accretive acquisitions.”

However, they noted, given its size and leverage position, the company will probably need to fund expenditures “with mostly equity that should modestly offset the earnings accretion.”

Moreover, the experts added, the stock seems to trade at a discount to its peer group.

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Investment Thesis

The report highlights a few points that are key to the investment thesis:

• 1) CareTrust’s management has a rich operational background, which should help it deliver and differentiate the company from its competitors.
• 2) Given the REIT’s current portfolio, management will only need to “complete a few sizable accretive deals to drive significant earnings growth.” RBC estimates deals will reach $250 million both in 2016 and 2017; the analysts expect them to drive roughly 150 basis points of “annualized incremental FFO and AFFO growth on a leverage neutral basis.”
• 3) The in-place portfolio should generate organic growth in the 1 to 3 percent range in the foreseeable future, moving along with the CPI, which, in turn, determines annual rental rate increases.
• 4) An aging population and the continued enactment of the ACA bodes well for CareTrust in particular, and SNFs in general.
• 5) While the company’s financial standing seems healthy, leverage – although dropping – is still above the long-term target of 4.0x-5.0x.