Investing.com -- Fitch Ratings has positioned the ’BB+’ Long-Term Issuer Default Ratings (IDRs) of CareTrust REIT, Inc. (NASDAQ:NYSE:CTRE), CTR Partnership, L.P., and issue-level ratings of CTR Partnership, L.P. and CareTrust Capital Corp. on a positive watch. The decision follows CareTrust’s announcement of an agreement to acquire UK-based Care REIT, pending shareholder approval.
The acquisition will add approximately $66 million in yearly contractual rent to CareTrust’s portfolio and significantly enhance its operator and geographic diversification. The rating agency plans to resolve the rating watch once the transaction is completed, which is expected in the second quarter of 2025. Fitch will keep monitoring the transaction to understand the final post-transaction capital and organizational structures.
The rating is supported by long-term demographic trends, low leverage below positive sensitivities, strong financial flexibility and liquidity, and strong portfolio-level lease coverage. The positive watch may stay in place for longer than six months if the acquisition takes more than six months to close.
Over the past two years, CareTrust has completed significant external investment, primarily funded by equity. This has allowed the company to reduce leverage to 0.7x as of December 31, 2024, and improved its scale and geographic and operator diversification over time. These factors are expected to further improve post-acquisition.
CareTrust’s leverage is extremely low, at approximately 0.7x as of December 31, 2024, well below the 4.0x level that Fitch considers consistent with a higher IDR. The company’s financial policy aims to maintain leverage between 4.0x and 5.0x, and it has been at or below this range in most periods. Additional equity issuances are likely, which would keep leverage well below the long-term target.
Tenant concentration has declined over time and is expected to approach 50% after the Care REIT acquisition. At the end of 2024, CareTrust’s top five tenants represented 65% of annualized base rent.
Operator profitability has been recovering since the pandemic, and CareTrust’s portfolio coverage now exceeds pre-Covid levels. As of September 30, 2024, EBITDARM Coverage was 2.82x, up from 2.38x as of September 30, 2019.
CareTrust’s ratings reflect its strong financial metrics, including very low leverage, above-average operator lease coverage and unsecured borrowing strategy. The ratings also reflect the issuer’s moderately diversified portfolio of triple-net leased healthcare real-estate properties and long-lease maturity profile, which should become further diversified upon close of the Care REIT acquisition.
Fitch rates the IDRs of the parent REIT and its operating subsidiary, CTR Partnership, L.P. (BB+/RWP), on a consolidated basis using the weak parent/strong subsidiary approach and open access and control factors, as the entities operate as a single enterprise with strong legal and operational ties.
Fitch expects to resolve the Rating Watch Positive upon the close of the transaction, and to review the appropriate sensitivities upon resolution of the Rating Watch.
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