CareTrust REIT, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. CareTrust is a healthcare-property REIT that primarily leases skilled nursing, senior housing and related properties to third-party operators. At quarter-end, it owned 228 facilities with 23,834 operational beds and units across 29 states; 226 facilities were under triple-net leases.
Financial highlights
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $46.5 million | $45.8 million |
| Net income (loss) | $(43.3) million | $20.5 million |
| Diluted earnings (loss) per share | $(0.45) | $0.21 |
| Cash from operating activities | $34.6 million | $33.9 million |
| Cash and cash equivalents, quarter-end | $26.6 million | $30.5 million |
- Revenue increased 2% year over year: rental income rose $0.8 million to $46.0 million, while interest and other income declined slightly.
- The net loss reflected a $59.7 million impairment charge on 20 properties classified as held for sale and a $3.8 million net loan-loss provision. Excluding those items, reported expenses were substantially lower; the filing does not present a non-GAAP adjusted earnings measure.
- Operating cash flow was broadly stable year over year. Investing activities used $24.1 million, primarily for property acquisitions and other investments. Financing activities used $3.8 million, including $26.0 million in dividends, partly offset by $25.0 million in revolver borrowings.
- Quarter-end debt principal was $705.0 million: $400.0 million of 3.875% notes due 2028, a $200.0 million term loan, and $105.0 million drawn on the revolving facility. Carrying value of debt was $698.7 million. The revolver matures February 2023, with two six-month extension options; the term loan matures February 2026.
- Quarter-end total assets were $1.594 billion and total equity was $844.6 million. The quarterly dividend declared was $0.275 per share.
Material changes and operating developments
- Compared with Q4 2021, rental income decreased 6% to $46.0 million. Management attributed the decline principally to tenants moved to cash-basis accounting and rent collectibility adjustments. Net loss was also affected by the quarter’s impairment and loan-loss charges.
- The company decided to pursue sales of 27 properties and repurpose three, together representing approximately 10% of contractual cash rent. The 27 held-for-sale properties had a $141.7 million net book value at March 31. Their estimated fair values relied on Level 3 assumptions, including comparable sales and estimated prices per unit.
- CareTrust acquired one skilled nursing facility and one multi-service campus for approximately $21.9 million; management estimated initial annual cash revenue of $2.1 million and an initial blended yield of 9.4%.
- Rental income included a $1.0 million collectibility adjustment. The company reported collecting 94.9% of Q1 contractual rent due including cash deposits applied, or 91.8% excluding deposits; approximately 93.2% of April contractual rent due had been collected by the filing’s reporting date.
Liquidity, outlook and risks
- Management said cash of $26.6 million, $495.0 million of available revolver capacity and $476.5 million of remaining ATM-program capacity, together with expected operating cash flows, should be sufficient for the next 12 months. This is management’s assessment, not a guarantee.
- The company was in compliance with applicable debt covenants at March 31, 2022. It had $5.5 million of committed property expansions and improvements, of which $4.4 million is subject to rent increases when funded.
- COVID-19 continued to pressure tenants through labor shortages, higher operating costs and occupancy challenges. Management reported seniors housing occupancy modestly improved in Q1, while skilled nursing occupancy was stable sequentially. Federal support and temporary regulatory waivers were expected to taper or change; a 1% Medicare sequestration cut began April 1, 2022, with the full 2% cut scheduled to resume thereafter.
- Tenant and geographic concentrations are material: Ensign generated 34% of Q1 revenue and Priority Management Group 16%; California represented 26% and Texas 22% of revenue. A CMS proposed FY2023 rule would reduce aggregate net SNF payments by an estimated 0.7%, or approximately $320 million, versus FY2022.
- Interest-rate and LIBOR transition exposure is relevant: $305.0 million of term-loan and revolver borrowings were variable-rate. A 100-basis-point rate increase was estimated to raise quarterly interest expense by approximately $0.8 million. The company had no interest-rate swaps at quarter-end.
- The filing provides no earnings or revenue guidance. The board retains discretion over dividends, subject to REIT distribution requirements. Management identified risks including rent collection and tenant credit, possible further held-for-sale impairments, COVID-19 effects, refinancing and capital-market access, and rising interest rates.
Important facts for investors to verify
- Progress and realized pricing on the 27 planned property sales, and whether further impairment charges are required.
- Rent collections, cash-basis tenant status and recovery prospects for the four operators with collectibility concerns; monitor the two other loans placed on non-accrual.
- Tenant operating performance, particularly Ensign and Priority Management Group, and exposure to California and Texas.
- Revolver refinancing or extension plans ahead of its February 2023 maturity, variable-rate exposure, and the transition away from LIBOR.
- Whether occupancy, labor costs, government support changes and Medicare reimbursement affect tenant solvency and lease payments.