On Monday, BMO Capital Markets adjusted its stance on CareTrust REIT (NYSE:CTRE), moving from an Outperform rating to Market Perform. This shift comes with a new price target set at $32.00, down from the previous target. The change in rating reflects a cautious approach following allegations surrounding one of CareTrust's significant tenants, PACS.
CareTrust REIT has seen a commendable year-to-date performance, with a 31% increase compared to the 11% gain of the RMZ index. The real estate investment trust is expected to continue this trajectory into 2025, with forecasts suggesting a 17% year-over-year growth in funds from operations (FFO), largely due to beneficial acquisitions.
Despite the optimistic growth outlook, the recent allegations involving PACS have prompted a reassessment. PACS contributes approximately 20% of CareTrust's pro-forma rents and has been a considerable factor in the company's external growth. The analyst expressed concerns over the potential impact on PACS's rent coverage, especially for new acquisitions, if there are changes to billing policies that diverge from initial underwriting expectations.
The industry in which CareTrust operates, specifically skilled nursing facilities (SNF), typically works with modest margins. These narrow margins could be further pressured if PACS's billing practices are altered in response to the allegations.
The downgrade to Market Perform indicates a neutral view on the stock's potential, suggesting that the stock may perform in line with the broader market or sector in the near term. The lowered price target to $32.00 is a direct response to the perceived risks associated with PACS and its influence on CareTrust's revenue stream.
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