CareTrust REIT, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. CareTrust is a healthcare-property REIT that primarily leases properties to third-party operators, generally under triple-net leases. At quarter-end it owned 158 leased facilities with 15,480 beds and units, operated three independent-living facilities with 264 units, and held $14.0 million in preferred-equity investments.
Financial performance and position
- Revenue: $30.6 million, up 29.5% from $23.6 million in Q1 2016. Rental income was $27.3 million, up 31%, primarily reflecting $6.3 million from investments made after January 1, 2016.
- Profit: Net income was $10.3 million versus $5.5 million. Diluted EPS was $0.15 versus $0.11. Net margin was approximately 33.6%, compared with 23.3% in the prior-year quarter.
- Expenses: Depreciation and amortization rose 24% to $9.1 million as the portfolio expanded. Interest expense declined 5% to $5.9 million; the prior-year amount included a $0.3 million deferred-financing-cost write-off.
- Cash flow: Operating cash flow was $20.2 million, up from $15.0 million. Investing used $55.5 million, mainly for real estate acquisitions; financing provided $29.1 million. Cash declined $6.2 million to $1.3 million.
- Debt and liquidity: Debt principal totaled $387.0 million: $260.0 million of 5.875% notes due 2021, a $100.0 million term loan due 2023, and $27.0 million drawn on the revolving facility. The revolver has $400.0 million of commitments and matures in 2019, with two six-month extension options. The company reported compliance with debt covenants.
- Equity and dividend: The company issued 7.17 million shares through its ATM program at an average $15.31 per share, generating $109.8 million gross proceeds. It declared a quarterly dividend of $0.185 per share, payable April 14, 2017.
Material changes and transactions
- In February, CareTrust acquired two assisted-living and memory-care facilities with 88 units for $26.1 million; annual cash rent increased by $2.2 million under an amended lease.
- In March, it acquired a five-facility, 455-bed skilled-nursing portfolio for $29.2 million, with initial annual cash rent of $2.9 million.
- From January 1 through April 30, the company reported acquiring seven properties for approximately $55.3 million, including the two Q1 transactions.
- Total assets increased to $967.4 million from $925.4 million at year-end 2016. Real estate investments, net, rose to $940.4 million from $893.9 million.
Outlook, risks and other notable items
- Management said available cash, expected operating cash flow, and revolver availability should fund operations, scheduled debt service, and dividends for at least the next 12 months. No specific earnings or acquisition guidance was provided.
- Management intends to pursue additional healthcare-property investments, subject to suitable opportunities and financing availability. Future funding may include cash flow, debt, or equity issuance; access to capital on acceptable terms is not assured.
- Operator concentration is material: Ensign leased 93 facilities, with annualized rent of $56.5 million. CareTrust also reported $18.5 million of annual revenue from its Pristine master lease. Tenant performance, lease renewals, and the ability to replace operators are key risks.
- CareTrust amended the Pristine lease and guaranty arrangements, including an impound account for certain taxes and fees and additional collateral and guarantor support. It reported $2.2 million of related property-tax and permit-fee receivables with no reserve, and said it expects Pristine and affiliates to meet rent obligations.
- Variable-rate debt creates interest-rate exposure. A 100-basis-point increase would have raised Q1 interest expense by an estimated $0.3 million, assuming debt balances remained unchanged; no interest-rate swaps were in place.
- The filing describes Ensign’s 2013 DOJ settlement and corporate integrity agreement. CareTrust stated it has certain continuing operational obligations under the agreement but no liability related to the DOJ investigation. Ordinary-course claims and lawsuits were not expected to materially affect results.
- The company said there were no material changes to previously disclosed risk factors, and management concluded disclosure controls were effective as of March 31, 2017.
Important facts for investors to verify
- Tenant concentration and the financial and operational condition of Ensign, Pristine, and other major operators.
- Whether acquisition-driven rent growth translates into sustainable cash flow after financing costs and depreciation.
- Liquidity and refinancing capacity, including variable-rate exposure and the limited $1.3 million quarter-end cash balance.
- Dividend coverage by recurring operating cash flow and the company’s continued ability to access equity and debt markets.
- Collection of Pristine-related receivables and performance of the amended lease, guaranties, and collateral arrangements.