CareTrust REIT, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context
CareTrust is a healthcare-property REIT that primarily leases skilled nursing and senior-housing facilities to third-party operators under long-term triple-net leases. At year-end, it reported 185 leased facilities—92 leased to Ensign and 93 to other operators—and three independent-living facilities it operated. The filing’s portfolio tables also show 188 properties when those three operated facilities are included. Ensign accounted for 44% of 2017 rental revenue, excluding tenant reimbursements.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $133.0 million | $104.7 million |
| Rental income | $117.6 million | $93.1 million |
| Net income | $25.9 million | $29.4 million |
| Diluted EPS | $0.35 | $0.52 |
| FFO | $62.3 million | $61.5 million |
| FAD | $66.4 million | $65.1 million |
| Cash from operations | $88.8 million | $64.4 million |
| Cash and cash equivalents at year-end | $6.9 million | $7.5 million |
Revenue increased 27%, principally reflecting property investments made since the start of 2016. Net income declined despite revenue growth, reflecting a $11.9 million debt-extinguishment loss, a $10.4 million reserve for Pristine-related advances and deferred rent, and a $0.9 million property impairment; a $3.5 million gain on disposition of a preferred-equity investment partly offset these items. Net margin was approximately 19.5%, versus 28.0% in 2016. The company’s non-GAAP FFO and FAD were modestly higher year over year.
Fourth-quarter 2017 revenue was $36.6 million and net income was $2.3 million, or $0.03 per diluted share, compared with fourth-quarter 2016 revenue of $28.2 million and net income of $8.4 million, or $0.14 per diluted share.
Year-end debt was $565 million principal: $300 million of 5.25% senior notes due 2025, a $100 million term loan due 2023, and $165 million drawn on a $400 million revolving facility. Cash was $6.9 million; the company reported $235 million of undrawn revolving capacity and $236.1 million remaining under its ATM equity program. It reported compliance with debt covenants. Dividends declared were $0.74 per share for 2017, up from $0.68.
Material changes and unusual items
- Issued $300 million of 5.25% notes in May 2017 and redeemed $260 million of 5.875% notes due 2021. The refinancing extended maturity but generated a $11.9 million extinguishment loss, including a $4.2 million write-off of deferred financing costs.
- Raised $173.8 million gross through ATM stock sales, issuing approximately 10.6 million shares and increasing shares outstanding.
- Invested $296.5 million in real-estate acquisitions during 2017. From January 2017 through February 27, 2018, acquisitions and a mortgage loan totaled approximately $315.6 million, with projected initial annual cash revenues of $27.4 million and a blended yield of about 9.0%.
- Pristine’s rent and reimbursements became a significant collection concern. CareTrust reserved $10.4 million, began recognizing Pristine rent on a cash basis, transferred seven facilities to Trillium in December 2017, and entered a February 2018 agreement to transfer the remaining retained facilities. Trillium’s new lease increased annual base rent on the transferred facilities to about $11.5 million.
- Transferred La Villa to Ensign after determining the skilled-nursing property was no longer economically viable; recorded a $0.9 million impairment, with no contractual rent adjustment.
Outlook, risks and contingencies
Management said available cash, expected operating cash flow, credit-facility availability and potential equity issuance should fund operations, scheduled debt service and dividend plans for at least 12 months. It plans continued acquisitions as suitable opportunities and financing permit; the filing provides no specific earnings or revenue guidance. Future dividends remain subject to board approval, results, debt covenants and REIT requirements.
Key risks include reliance on operator rent payments—especially Ensign’s 44% contribution—tenant financial deterioration and reimbursement or regulatory changes affecting healthcare operators. The company also cites acquisition competition, interest-rate exposure, lease transitions, geographic and natural-disaster risks, and maintaining REIT status. A 100-basis-point increase in variable borrowing rates was estimated to increase annual interest expense by approximately $2.7 million. No interest-rate swaps were in place at year-end. The company reported no material legal proceedings against it; it noted that adverse outcomes involving Ensign could matter if Ensign could not meet indemnification obligations.
Important facts for investors to verify
- Ensign’s and other tenants’ current lease coverage, rent-payment performance and capacity to meet lease obligations.
- Pristine’s recovery of reserved amounts and the timing, execution and economics of the remaining facility transfers; Trillium’s ability to fund operations and pay rent.
- Acquisition yields and cash revenue relative to financing costs, capital needs and any dilution from further equity issuance.
- Debt maturities, variable-rate exposure, covenant headroom and actual liquidity available after planned investments and dividends.
- The portfolio-count presentation: 185 leased facilities plus three company-operated facilities, versus 188 properties shown in certain filing tables.