CareTrust REIT, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. CareTrust is a healthcare-focused REIT that primarily owns and leases skilled nursing, seniors housing and related properties under triple-net leases.
Business context and operating performance
At year-end, the portfolio comprised 218 facilities and 22,466 operational beds and units across 28 states, plus one $15.0 million mezzanine loan. Rental income was the principal revenue source.
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $178.3 million | $163.4 million | Up 9.1% |
| Rental income | $173.6 million | $155.7 million | Up 11.5% |
| Net income | $80.9 million | $46.4 million | Up 74.4% |
| Diluted EPS | $0.85 | $0.49 | Up $0.36 |
| FFO / FAD | $133.6 million / $139.3 million | $113.0 million / $117.8 million | FFO up 18.2%; FAD up 18.3% |
| Net cash from operating activities | $145.7 million | $126.3 million | Up $19.4 million |
Fourth-quarter revenue was $44.1 million and net income was $21.1 million, compared with $44.2 million and $20.7 million, respectively, in fourth-quarter 2019. FFO and FAD are non-GAAP supplemental measures and should not be treated as substitutes for GAAP earnings or operating cash flow.
Liquidity, debt and distributions
- Year-end cash and cash equivalents were $18.9 million. Total debt principal was $550.0 million: $300.0 million of 5.25% senior notes due 2025, a $200.0 million term loan due 2026, and $50.0 million drawn on a $600.0 million revolving facility. Debt carrying value, net of deferred fees, was $545.6 million.
- Management said cash, expected operating cash flows and availability under the ATM program and credit facility were expected to fund operations, scheduled debt service and planned dividends for at least the next 12 months. Revolver availability is subject to facility conditions and covenants. The company reported compliance with applicable debt covenants at year-end.
- Cash flow from investing activities was negative $41.6 million; financing activities used $105.6 million, including $93.2 million of dividends paid and $10.0 million of net credit-facility repayments.
- Dividends declared were $1.00 per share for 2020, versus $0.90 in 2019. The $0.25-per-share fourth-quarter dividend was paid in January 2021 and treated as a 2021 distribution for federal tax purposes.
Material changes versus 2019
- Net income increased substantially, in part because 2019 included $16.7 million of real-estate impairment charges and a $1.1 million loan-loss provision; neither was recorded in 2020. The 2019 results also included $11.8 million of rent write-offs, while 2020 included $1.0 million of recovery of previously reversed rent.
- Rental income growth reflected acquisitions and rent increases, partly offset by asset sales and lease amendments. Interest expense fell 16% to $23.7 million, attributed to lower average debt balances and interest rates.
- Operating cash flow increased, while acquisition activity slowed: 2020 acquisitions totaled approximately $89.8 million for eight properties, compared with $326.7 million for 22 properties in 2019. The 2020 acquisitions were expected to produce approximately $7.6 million in initial annual cash rent, an estimated blended yield of 8.5%.
- Reported annual occupancy at leased SNFs fell to 75% from 78%, and at multi-service campuses to 73% from 76%; ALF/ILF occupancy increased to 86% from 83%. Tenant-provided occupancy data was not independently verified.
Outlook, commentary and risks
- COVID-19: Management described higher tenant costs, occupancy pressure and potential rent-collection, credit-loss and valuation risks. SNF occupancy continued to decline in fourth-quarter 2020. The company reported that approximately 100% of contractual rent due for January 2021 had been collected, before considering cash deposits; this is a point-in-time report, not a forecast.
- Operators reported approximately $150.8 million of federal and state COVID-related relief approved, received and retained to date. Relief funding carried spending, reporting and possible repayment requirements. Some operators had returned or planned to return funds.
- Tenant and operator concentration remains important: Ensign represented 32% of 2020 rental income, excluding operating expense reimbursements; PMG represented 16%. Ensign-guaranteed Pennant leases represented about 5% of annualized contractual rental income. Ensign leases and guarantees are a material source of rent and credit exposure.
- Other key risks include healthcare reimbursement and regulatory changes, staffing and operating costs at tenant facilities, tenant defaults or bankruptcies, difficulty replacing operators, regional concentration and natural disasters, variable interest rates and the transition away from LIBOR, and maintaining REIT qualification. A 100-basis-point increase in variable borrowing rates was estimated to add about $2.5 million to 2020 interest expense.
- The filing provides no formal numerical earnings or acquisition guidance. Management’s strategy is to pursue acquisitions and diversification while maintaining balance-sheet flexibility. The company had $500 million available under its new ATM program at year-end and did not issue shares under it during 2020.
- No material legal proceedings or off-balance-sheet arrangements were reported. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Current rent collection, tenant coverage and occupancy trends, particularly for SNFs and major tenant groups; confirm whether January 2021 collections persisted.
- Ensign’s and PMG’s ability to meet lease obligations, and the scope and continuing value of Ensign’s guarantees, including the Pennant lease guarantee.
- How tenant-reported COVID relief was ultimately used, whether amounts were repaid, and whether relief supported rent-paying capacity.
- Actual available liquidity after facility conditions and covenants, debt maturities and refinancing plans, and the effect of LIBOR replacement on variable-rate borrowing costs.
- Whether the $1.00-per-share dividend is supported by recurring cash generation and REIT taxable income; reconcile GAAP earnings, FFO/FAD and cash distributions.