CareTrust REIT, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. CareTrust owns, leases and finances healthcare properties. At quarter-end, it owned 215 facilities with 22,727 operational beds and units across 28 states, and held $140.8 million of real estate-related loans and investments.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Total revenue | $50.6 million | $46.5 million | Up $4.1 million, primarily from higher interest and other income |
| Rental income | $46.2 million | $46.0 million | Nearly flat; lower cash-basis tenant collections were offset by rent increases and the prior-year collectibility adjustment |
| Interest and other income | $4.4 million | $0.5 million | Increase reflects loan investments originated in 2022 and a loan prepayment penalty |
| Interest expense | $9.8 million | $5.7 million | Up 71%, mainly due to higher rates and revolving-credit borrowings |
| Net income (loss) | $19.2 million | $(43.3) million | Improved mainly because impairment charges were substantially lower |
| Diluted EPS | $0.19 | $(0.45) | — |
| Cash from operations | $35.1 million | $34.6 million | Relatively stable |
The company recorded $1.9 million of real estate impairment in Q1 2023 versus $59.7 million in Q1 2022, and no loan-loss provision versus $3.8 million in Q1 2022. Operating or FFO/AFFO margin figures are not clearly provided in the supplied filing text.
Balance sheet, debt and liquidity
- At March 31, 2023, total assets were $1.62 billion, cash and cash equivalents were $28.1 million, and total liabilities were $781.9 million.
- Debt principal totaled $735 million: $400 million of 3.875% senior notes due 2028, a $200 million term loan due 2026, and $135 million drawn on a $600 million revolving facility. The revolver had $465 million of stated available capacity. The company reported compliance with its debt covenants.
- Management said cash, expected operating cash flow, revolver capacity and ATM availability were sufficient for at least the next 12 months. Debt carrying value was $729.8 million.
- Cash dividends paid were $27.4 million; the declared quarterly dividend was $0.28 per share. The filing identifies the REIT distribution requirement and notes dividends remain at the board’s discretion.
- Committed property expansions and improvements totaled $14.8 million, expected to be funded over the next one to two years.
Material changes and developments
- Interest and other income rose as the loan portfolio expanded. Real estate-related investments declined to $140.8 million, including repayment of a $15 million mezzanine loan; fair-value losses on these investments were $0.5 million.
- Q1 contractual rents collected were 96.3% of amounts due, excluding cash deposits; April collections were 97.5%. Management attributed tenant pressures to labor costs and shortages, occupancy below pre-pandemic levels, inflation and reduced pandemic-related support.
- Lease changes included a $1.7 million annual cash-rent reduction under the amended Premier lease; termination of a Noble lease with approximately $2.3 million in annual rent and a replacement Pennant lease at approximately $0.8 million; and a $0.7 million rent deferral under the amended Hillstone lease.
- Six facilities were classified as held for sale at quarter-end. Management was considering sale of an 11-property skilled nursing portfolio; it warned that a sufficiently likely sale plan or qualifying held-for-sale classification could lead to a material impairment.
- From January 1 through May 10, the company acquired three skilled nursing facilities and two assisted living facilities for approximately $47.5 million, expected to generate about $4.5 million in initial annual cash revenue at a blended initial yield of approximately 9.6%, before rent abatements.
- A new $500 million ATM program was established. In April, the company entered a forward sale for 1,757,500 shares at a weighted average price of $19.91 before fees; it had received no proceeds and had not settled the transaction as of the report date.
Outlook, risks and contingencies
- The company highlighted possible tenant stress from the end of the COVID-19 Public Health Emergency on May 11, 2023, including potential effects on skilled nursing occupancy and revenues as temporary Medicare rules expire and enhanced federal support phases down.
- Inflation and higher interest rates may pressure tenants, increase borrowing costs and affect loan valuations and property sale prices. A 100-basis-point increase in rates on variable-rate debt would have increased quarterly interest expense by approximately $0.8 million, based on the quarter-end balance; no interest-rate swaps were in place.
- Two operators accounted for at least 10% of rental revenue: Ensign, 36%, and Priority Management Group, 17%. California and Texas represented 28% and 23%, respectively, of rental revenue.
- A newly disclosed risk concerns bank failures or financial-institution disruptions potentially limiting the company’s or its tenants’ access to deposits, credit or letters of credit. The company reported no material legal proceedings and no material change to its other previously disclosed risk factors.
Investor verification priorities
- Monitor tenant rent collections, especially cash-basis tenants, and the credit and operating performance of Ensign and Priority Management Group.
- Assess variable-rate debt exposure, future borrowing costs, covenant headroom and the use of the $465 million revolver availability.
- Track held-for-sale properties and the possible 11-facility portfolio sale for sale proceeds and additional impairment risk.
- Verify the economics and final settlement proceeds of the ATM forward sale, including share dilution and adjustments to the forward price.
- Review the performance of the loan portfolio and the effects of market-rate and collateral-value changes on its Level 3 valuations.