CareTrust REIT, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 7, 2019. CareTrust is a healthcare-property REIT, primarily leasing properties to third-party operators under triple-net leases. At quarter-end, it had 199 facilities leased to operators, three company-operated independent living facilities, and additional preferred equity and mortgage-loan investments.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $39.7 million | $38.1 million | Up 4.1% |
| Net income | $16.1 million | $14.6 million | Up 9.9% |
| Diluted EPS | $0.18 | $0.19 | Down $0.01 |
| Net income / revenue | 40.5% | 38.3% | Approximate, calculated |
| Operating cash flow | $30.1 million | $22.1 million | Up $8.0 million |
| Cash and equivalents | $214.4 million | $36.8 million at Dec. 31, 2018 | Up $177.6 million |
| Total debt, principal | $685.0 million | $495.0 million at Dec. 31, 2018 | Up $190.0 million |
- Rental income increased 13% to $38.3 million, principally reflecting acquisitions made after Q1 2018 and rent increases. Interest expense declined 3% to $6.9 million.
- Net cash used in investing was $66.2 million, mainly for real estate acquisitions and mortgage lending. Financing provided $213.7 million, including net credit-facility borrowings and $47.3 million of net common-stock proceeds; dividends paid were $17.7 million.
- Debt at March 31 consisted of $300 million of 5.25% senior notes due 2025, a $200 million term loan, and $185 million drawn on a $600 million revolving facility. Cash less debt principal was approximately $420.6 million. The filing reports compliance with applicable debt covenants.
- Equity was $811.0 million and total assets were $1.524 billion. The company declared a $0.225-per-share dividend, payable April 15, 2019.
Changes, outlook and risks
- Comparability: CareTrust adopted lease accounting Topic 842 on January 1, 2019. Tenant property-tax recoveries previously presented separately as reimbursements are now generally included in rental income when the company pays the third party, while associated taxes appear in property-tax expense. Accordingly, Q1 2019 revenue and expense comparisons are affected by classification: Q1 2018 included $3.0 million of tenant reimbursements and $3.0 million of property taxes; Q1 2019 reported neither reimbursements nor the same gross presentation, including $0.8 million of taxes in rental income and expense. Q1 2018 also included a $2.1 million gain on real estate sale; Q1 2019 had no sale gain. Weighted-average shares rose from 75.5 million to 88.0 million, contributing to lower EPS despite higher net income.
- Portfolio growth: Q1 acquisitions comprised five properties for approximately $52.9 million, with initial annual cash rent of $4.8 million. From January 1 through May 7, 2019, the company reported acquisitions of 15 skilled nursing facilities and three multi-service campuses for approximately $277.9 million, expected to produce initial annual cash revenue of $24.8 million and an initial blended yield of about 8.9%.
- Subsequent financing and acquisition activity: An April acquisition was described as approximately $215 million inclusive of capital commitments and estimated costs, with contractual initial annual rent of about $19 million. An April common-stock offering generated approximately $148.4 million net proceeds; about $150 million of revolver borrowings were subsequently repaid, primarily with offering proceeds. The company also acquired one facility in May for approximately $10 million.
- Management said cash, operating cash flows, and access to the amended credit facility and equity program should be sufficient for operations, scheduled debt service, and planned dividends for at least the next 12 months. It provided no specific earnings or revenue guidance.
- Ensign accounted for 40% of annualized rental income and leased 93 facilities. This operator concentration, tenant ability to meet lease obligations, access to capital, acquisition execution, REIT qualification, and variable-rate borrowing costs are key risks. A 100-basis-point increase in variable rates was estimated to increase quarterly interest expense by approximately $1.0 million; no interest-rate swaps were in place.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2019. It cautioned that ordinary-course claims may arise; it considers them not expected to have a material adverse effect.
Important facts for investors to verify
- Reconcile lease-accounting reclassifications when comparing revenue, property-tax expense, and margins year over year.
- Assess Ensign’s financial and operating condition given its 40% share of annualized rental income and cross-default provisions across its master leases.
- Confirm debt outstanding and revolver availability after the April acquisition and subsequent repayment, and monitor variable interest rates and covenant headroom.
- Evaluate the economics, rent commencement, tenant performance, and funding of the substantial acquisitions reported through May 7, 2019.
- Review the effect of share issuance on per-share results and dividend coverage, and confirm that cash flow supports planned distributions and growth.