CareTrust REIT, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. CareTrust owns and leases healthcare properties, primarily under triple-net leases. At quarter-end it owned 223 facilities with 23,301 operational beds and units across 28 states; tenants generally bear property operating costs.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $48.3 million | $44.2 million | $94.0 million | $88.5 million |
| Net income | $21.3 million | $18.9 million | $41.8 million | $38.3 million |
| Diluted EPS | $0.22 | $0.20 | $0.43 | $0.40 |
| Operating cash flow | Not separately provided for Q2 | Not separately provided for Q2 | $70.6 million | $67.9 million |
- Q2 revenue increased 9% year over year, primarily from property investments made since April 2020 and contractual rent increases. Net income rose 13%; calculated net margin increased to approximately 44.2% from 42.9%.
- For the first half, revenue grew 6% and net income 9%; calculated net margin was approximately 44.5% versus 43.2%. Rental income rose 9%, while interest and other income fell 56%, mainly because prior-period mortgage and other loans had been repaid.
- At June 30, real estate investments, net, were $1.575 billion; total assets were $1.912 billion and equity was $929.6 million. Debt principal totaled $950 million ($939.9 million carrying value): $400 million of 2028 notes, $300 million of 2025 notes, a $200 million term loan and $50 million drawn on the revolver.
- Cash and cash equivalents were $1.8 million. Restricted cash of $309.2 million was earmarked for the 2025-note redemption. The company reported $550 million of revolver availability at quarter-end and said available cash, operating cash flow and financing access should cover operations, debt service and dividends for at least 12 months.
- First-half investing cash outflow was $145.0 million, including $147.8 million of real estate acquisitions; financing cash inflow was $366.5 million, led by the $400 million notes issuance. Quarterly dividends declared were $0.265 per share.
Material changes and notable items
- In June, CareTrust issued $400 million of 3.875% senior notes due 2028. On July 1, it redeemed all $300 million of 5.25% notes due 2025 at a premium. The redemption resulted in a reported third-quarter debt-extinguishment loss of $10.8 million, including a $7.9 million prepayment penalty.
- Six facilities acquired in the first half for $151.2 million were expected to produce initial annual cash rent of $10.9 million. Including subsequent acquisitions through August 5, eight facilities were acquired for approximately $183.6 million, with expected initial annual cash revenue of $13.1 million and an initial blended yield of approximately 7.3%.
- In August, two Ensign-leased facilities were acquired for approximately $32.5 million, funded with an additional $50 million revolver draw. Also in August, one Noble-operated assisted living facility with a $4.9 million carrying value met held-for-sale criteria; an impairment, expected to be below carrying value, was anticipated in Q3.
- Q2 general and administrative expense increased 22%, driven mainly by higher stock compensation and wages. First-half depreciation and amortization increased 3%; interest expense decreased 2% for the half, reflecting lower average rates partly offset by higher average debt.
Outlook, risks and contingencies
- No specific earnings or FFO guidance was provided. Management expects to pursue additional healthcare-property investments as opportunities and financing permit.
- COVID-19 continued to pressure tenants through higher operating costs and occupancy declines. Skilled-nursing occupancy had improved since February, while seniors-housing occupancy declined further in Q2. Management said changing infection rates, variants, vaccination and government responses make the effects uncertain and potentially material.
- Operators reported approximately $132.2 million of federal and state relief approved, received and retained to date. About 100% of Q2 contractual rent and 96.2% of July rent had been collected as of the report, before applying cash deposits. One seniors-housing tenant missed July rent and requested a temporary deferral; CareTrust was considering the request.
- Tenant concentration is material: Ensign represented 31% of Q2 rental income and Priority Management Group 15%. The company cited tenant credit and lease performance, acquisition availability, access to capital, interest rates, REIT qualification and pandemic impacts among key risks. It was in compliance with applicable debt covenants at June 30.
- Variable-rate debt creates interest-rate exposure: management estimated a 100-basis-point rate increase would have added approximately $1.3 million to first-half interest expense. The company had no interest-rate swaps and noted the transition away from LIBOR as a risk.
- CareTrust had committed $13.1 million for capital improvements, of which $11.6 million was subject to rent increases when funded. It reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the rent deferral requested by the seniors-housing operator was granted, and whether deferred rent was collected as planned.
- Subsequent rent collections, tenant occupancy and operating performance, particularly given COVID-19 exposure and operator concentration.
- The final impairment recognized on the Noble-operated facility and the financial impact of the 2025-note redemption.
- Post-quarter revolver borrowings, liquidity after the August acquisitions, and compliance with debt covenants.
- Whether acquisition yields and contractual rent escalators translate into durable cash flows, and how much further ATM equity issuance may dilute shareholders.