CareTrust REIT, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; financial statements are unaudited. CareTrust is a healthcare-property REIT that primarily leases facilities to operators under triple-net leases. At quarter-end, it owned 212 leased facilities with 21,652 beds and units across 28 states, operated one 168-unit independent living facility, and held three mortgage loans receivable.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $44.3 million | $39.7 million |
| Net income | $19.3 million | $16.1 million |
| Diluted EPS | $0.20 | $0.18 |
| Operating cash flow | $36.5 million | $30.1 million |
| Cash and cash equivalents | $23.9 million | $20.3 million at Dec. 31, 2019 |
| Total debt, principal amount | $575.0 million | $560.0 million at Dec. 31, 2019 |
| Total assets | $1,531.2 million | $1,518.9 million at Dec. 31, 2019 |
Rental income rose 11% to $42.5 million, principally reflecting acquisitions and rent increases, partly offset by asset sales and lower cash rents. Interest and other income increased to $1.3 million, mainly from mortgage-loan interest. Net margin was approximately 43.6%, versus 40.5% in Q1 2019, calculated as reported net income divided by revenue. Interest expense declined 2% to $6.7 million; depreciation and amortization increased 11% to $13.2 million; and general and administrative expense increased 22% to $4.1 million.
Investing activities used $24.3 million, compared with $66.2 million in Q1 2019, while financing activities used $8.6 million; the prior-year quarter included substantial debt and equity proceeds. Cash increased by $3.6 million during Q1. The company declared a $0.25-per-share dividend, payable April 15, 2020. Dividends declared were $23.9 million.
Debt at March 31 comprised $300 million of 5.25% senior notes due 2025, a $200 million term loan due 2026, and $75 million drawn on a $600 million revolving facility due 2023, with two six-month extension options. The company reported compliance with applicable debt covenants. The filing states it expects cash, operating cash flows, and available financing to cover operations, scheduled debt service, and planned dividends for at least the next 12 months; this is management’s assessment, not a guarantee.
Material changes and transactions
- Two Q1 property acquisitions—a skilled nursing facility and an assisted living facility—cost approximately $26.1 million and were expected to generate $2.3 million in initial annual cash rent, an initial blended yield of approximately 8.7%.
- CareTrust sold six skilled nursing facilities for $36.0 million in February. It received $3.5 million in cash and financed $32.4 million of the sale with a short-term mortgage loan; the transaction generated an approximately $0.1 million loss.
- In April, the Cascade loan was settled with $18.9 million in cash and a new $13.9 million CareTrust loan. The combined co-lender mortgage was $33.9 million, with CareTrust’s portion initially bearing LIBOR plus 4.00% (subject to a 1.75% LIBOR floor) and maturing April 29, 2022, with two six-month extension options.
- In April, the CommuniCare loan maturity was extended to May 29, 2020. The loan was $26.5 million, bore 10% interest, and had been scheduled to mature earlier in 2020.
- The company adopted the expected-credit-loss accounting standard on January 1, 2020 and elected fair-value accounting for its mortgage loans. The $61.8 million reported fair value was classified as Level 3; $2.4 million of loans were at least 90 days past due. The filing reported no Q1 real estate impairments or rental-income write-offs.
Outlook, risks, and other notable items
- COVID-19: Management warned that the pandemic could materially affect the company and its tenants through higher staffing and protective-equipment costs, occupancy declines, rent-payment pressure, loan losses, impairments, litigation, and reduced access to capital. The impact and duration could not be estimated. The company reported collecting approximately 99.3% of contractual rent due for April and said two of its three mortgage loans were expected to be repaid by the end of Q2; these were statements made as of the filing date.
- CareTrust ordered approximately $1.2 million of personal protective equipment from March 27 through May 7, 2020, to provide to tenants at its volume-discounted cost. Government relief programs, including the CARES Act and increased federal Medicaid funding, were expected to provide some tenant support.
- Tenant concentration is material: Ensign represented 32% of rental income in Q1 2020, down from 40% a year earlier; Priority Management Group represented 16%, up from 8%. Tenant financial health and rent-paying capacity are important exposures.
- The company launched a new at-the-market equity program with up to $500 million available; there was no program activity through March 31. Its board also authorized up to $150 million of share repurchases through March 31, 2023; no repurchases under the program occurred in Q1.
- Variable-rate debt exposes the company to interest-rate and LIBOR-transition risk. Management estimated that a 100-basis-point increase in rates on variable-rate debt would have increased Q1 interest expense by approximately $0.7 million. No interest-rate swaps were in place at quarter-end.
- Other risks include tenant nonpayment or bankruptcy, lease renewals and replacement operators, acquisition availability, REIT qualification, debt covenant compliance, and the ability to refinance or access capital. The company reported no material legal proceedings and effective disclosure controls as of March 31.
Important facts for investors to verify
- Subsequent collection of rent and performance of tenants, especially Ensign and PMG, as COVID-19 effects develop.
- Repayment, extensions, collateral values, and credit-loss exposure for the mortgage loans, including the Manteca foreclosure process and the April Cascade and CommuniCare developments.
- Liquidity and covenant headroom, variable-rate borrowing costs, and refinancing or capital-raising access.
- Whether the declared dividend remains supported by operating cash flow and tenant rent collections.
- Actual occupancy, operating costs, and financial assistance received by tenants, and whether pandemic-related effects lead to rent concessions, impairments, or loan losses.