CareTrust REIT, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. CareTrust is a healthcare-property REIT, with 228 facilities and 23,876 operational beds and units across 29 states. It also held $115.2 million of real estate-related loans.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $47.6 million | $48.3 million | $94.0 million | $94.0 million |
| Net income (loss) | $20.7 million | $21.3 million | $(22.6) million | $41.8 million |
| Diluted EPS | $0.21 | $0.22 | $(0.24) | $0.43 |
| Operating cash flow | Not stated for the quarter | $68.3 million | $70.6 million |
- Q2 rental income was $46.8 million, down 2% year over year. First-half rental income was $92.8 million, essentially flat year over year.
- First-half results included $61.4 million in real estate impairment charges and a net $3.8 million loan-loss provision. Without these unusual charges, reported first-half net loss would have been materially different; the filing does not present an adjusted earnings measure here.
- At June 30, cash was $30.3 million. Total debt carrying value was $798.9 million, comprising $394.7 million of senior notes, $199.2 million of term debt and $205.0 million drawn on the revolver. Total liabilities were $847.5 million and equity was $838.3 million.
- Six-month investing cash outflow was $125.6 million, principally reflecting real estate and loan investments. Financing cash inflow was $67.7 million, including $125.0 million of revolver borrowings and $52.8 million of dividends paid.
- Quarterly common dividends declared were $0.275 per share. The company reported compliance with applicable debt covenants.
Material changes and portfolio developments
- CareTrust classified 27 properties as held for sale, with a June 30 net book value of $141.8 million. The properties and three properties planned for repurposing represented approximately 9% of contractual cash rent. A $59.7 million impairment was recorded in Q1 on 20 of the held-for-sale properties; a further $1.7 million Q2 impairment related to one SNF.
- Rental collectibility concerns led to a $1.0 million first-half rent adjustment and a move to cash-basis accounting for three operators during the first half. The company said it was not probable it would collect substantially all contractual obligations from four existing and former operators.
- Rent collections were 93.9% of contractual rent due in Q2, including cash deposits, and 92.1% excluding deposits. July collections were 102.1% including deposits and 94.1% excluding them.
- Two property acquisitions during the first half cost approximately $21.9 million and were expected to generate $2.1 million in initial annual cash rent. The company also originated a $75 million subordinate “C” tranche senior secured loan and a $25 million mezzanine loan. These loan investments carry credit and subordination risk.
- After quarter-end, on August 1, CareTrust extended a $22.3 million subordinate “B” tranche secured loan, funded with cash and revolver borrowings.
Outlook, risks and contingencies
- Management said cash, operating cash flow, $395.0 million of revolver availability and $476.5 million of remaining ATM capacity were expected to cover needs for at least the next 12 months. This is management’s assessment, not a guarantee of future liquidity.
- No company-specific earnings or revenue guidance is provided in the filing. CMS’s July 29 final rule projected a 2.7% aggregate increase in SNF Medicare payments for fiscal 2023, effective October 1, 2022.
- Management described persistent tenant pressures from COVID-19, labor shortages, higher operating costs, lower occupancy and reduced stimulus support. Seniors housing and SNF occupancy remained below pre-pandemic levels; SNF skilled mix declined in Q2 from Q1.
- Inflation and rising rates may increase tenant costs and CareTrust’s borrowing expense. A 100-basis-point increase in variable rates was estimated to add approximately $2.0 million to first-half interest expense. The company had $405 million of variable-rate term and revolver debt outstanding at quarter-end and no interest-rate swaps.
- The revolver matures February 8, 2023, with two optional six-month extensions. U.S. dollar LIBOR transition was expected to require a replacement benchmark; the company anticipated SOFR but said terms were not yet settled.
- Further impairment charges are possible if held-for-sale properties do not sell at estimated prices. Other risks include tenant payment and lease-renewal capacity, concentration, access to capital and the COVID-19 and regulatory environment. Ensign generated 35% of Q2 rental revenue and Priority Management Group 16%; California and Texas represented 27% and 22%, respectively.
- The company reported no material legal proceedings and no material changes to previously disclosed risk factors. It stated that disclosure controls were effective as of June 30, 2022.
Investor verification priorities
- Track completion and sale proceeds for the 27 held-for-sale properties against the assumptions underlying the $59.7 million impairment, and assess the potential for additional write-downs.
- Monitor rent collections excluding deposits, cash-basis tenants, and any recoveries of the first-half collectibility adjustments.
- Review tenant operating performance and concentration, particularly Ensign, Priority Management Group, California and Texas.
- Assess the refinancing or extension plan for the February 2023 revolver maturity, variable-rate exposure and LIBOR transition.
- Monitor credit performance and valuation of the subordinate secured and mezzanine loans, including the post-quarter $22.3 million loan.
- Compare cash generation and liquidity with dividends, planned capital spending, acquisitions and management’s 12-month liquidity assessment.