CareTrust REIT, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; filed August 6, 2020.
Business context
CareTrust is a healthcare-property REIT that primarily leases facilities to third-party operators under triple-net leases. At quarter-end it owned and leased 212 facilities with 21,659 operational beds and units across 28 states, operated one 168-unit independent-living facility, and held a $13.9 million mortgage loan receivable. Ensign accounted for 32% and Priority Management Group for 17% of rental income in Q2 2020.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $44.2 million | $46.2 million | $88.5 million | $85.9 million |
| Net income | $18.9 million | $19.7 million | $38.3 million | $35.8 million |
| Diluted EPS | $0.20 | $0.21 | $0.40 | $0.39 |
| Rental income | $42.5 million | $44.1 million | $85.0 million | $82.5 million |
| Interest expense | $5.8 million | $7.3 million | $12.6 million | $14.1 million |
| Operating cash flow | Not separately presented for the quarter | $67.9 million | $61.7 million |
Q2 revenue fell 4% and net income fell 4% year over year; first-half revenue grew 3% and net income grew 7%. Lower Q2 rent reflected property dispositions and lease amendments, partly offset by new investments, rent increases, and tenant reimbursements. Lower interest expense supported earnings. First-half general and administrative expense rose 11% to $8.8 million.
At June 30, total assets were $1.450 billion, cash and cash equivalents were $5.8 million, and total equity was $917.4 million. Debt had $500 million principal outstanding: $300 million of 5.25% senior notes due 2025 and a $200 million variable-rate term loan due 2026. The $600 million revolving facility had no borrowings outstanding. The company reported compliance with applicable debt covenants. Cash declined $14.5 million during the first half, to $5.8 million.
First-half investing cash flow was positive $25.3 million, compared with negative $297.2 million in 2019, reflecting substantial loan repayments and lower acquisition spending. Financing used $107.8 million, including $45.4 million of dividends and $60.0 million of net credit-facility repayments. Quarterly dividends were $0.25 per share, versus $0.225 in 2019.
Material developments, outlook, and risks
- COVID-19: Management reported increased tenant staffing and protective-equipment costs and declining occupancy at skilled nursing facilities. Approximately 98.7% of contractual rent due for July had been collected, before use of any cash deposits. Two tenants that had proposed deferrals later determined assistance was unnecessary; one senior-housing tenant had proposed partial rent relief, with discussions ongoing. Management warned that the pandemic could materially affect the company and tenants.
- Government COVID-related relief approved and received to date by the company’s skilled-nursing operators was estimated at $137.6 million. CareTrust purchased approximately $1.2 million of protective equipment for tenants from March 27 through August 6.
- Liquidity outlook: Management said cash, expected operating cash flow, and available credit and equity facilities should fund operations, scheduled debt service, and projected dividends for at least 12 months. The company had $500 million available under its new at-the-market equity program, with no issuance through June 30. This is management’s assessment, not formal earnings guidance.
- Investments and dispositions: Two facilities were acquired in the first half for approximately $26.1 million, with expected initial annual cash rent of $2.3 million. Six skilled-nursing properties were sold for $36.0 million; the associated $13.9 million mortgage loan was repaid in full in July, after quarter-end.
- Other risks and commitments: The company had committed $13.2 million for expansions and capital improvements, of which $12.4 million was expected to generate rent increases when funded. It cited tenant rent-paying capacity, occupancy, access to capital, variable interest rates and LIBOR transition, and potential property or loan impairment as risks. No material legal proceedings or property impairments were reported.
Important facts for investors to verify
- Subsequent rent collections, tenant relief requests, occupancy trends, and the adequacy and duration of government support for operators.
- Whether first-half operating cash flow and available financing continue to cover dividends, debt service, and committed capital spending as cash on hand remains relatively low.
- Tenant and geographic concentration, particularly Ensign’s 32% and PMG’s 17% shares of Q2 rental income.
- Repayment of the $13.9 million Cascade mortgage loan in July and the use of the proceeds.
- Debt covenant headroom and exposure to variable rates and the transition away from LIBOR.