CareTrust REIT, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. CareTrust is a healthcare-property REIT that primarily leases properties to operators under triple-net leases. At quarter-end, it owned and leased 105 facilities and operated three independent living facilities. Comparisons with 2014 require caution: pre-spin-off results include carve-out accounting and Ensign corporate expense allocations.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $18.0 million | $15.9 million | $52.3 million | $42.8 million |
| Net income (loss) | $0.7 million | $2.0 million | $5.0 million | $(8.8) million |
| Basic and diluted EPS | $0.02 | $0.09 | $0.14 | $(0.39) |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $29.0 million | $17.4 million |
Q3 net margin was approximately 4.0%, versus 12.4% a year earlier; nine-month net margin was approximately 9.6%, versus negative 20.5%. These are calculated as net income divided by revenue. Dividends declared were $0.16 per share for Q3 and $0.48 per share for the nine-month period.
- Revenue drivers: Q3 revenue rose 13%, primarily from investments made after October 1, 2014. Nine-month rental income increased $8.6 million, reflecting $4.8 million of incremental Ensign Master Lease rent and $3.8 million from newer investments. Preferred-equity income also contributed to growth.
- Expenses and earnings: Q3 interest expense rose 22% to $7.2 million, including a $1.2 million write-off of financing fees related to refinancing. General and administrative expense increased 187% to $2.3 million, mainly due to higher wages and stock compensation. For the nine months, G&A fell 38% year over year as prior-year spin-off-related legal and other costs declined. 2014 nine-month results included a $4.1 million debt-extinguishment loss.
- Cash flows: Nine-month operating cash flow was $29.0 million. Investing used $231.9 million, mainly for real-estate acquisitions; financing provided $189.6 million, including $163.5 million of net common-stock proceeds. Cash declined $13.2 million during the period to $12.1 million.
- Assets and debt: Total assets were $685.0 million, including $651.6 million of net real estate investments and an $8.2 million preferred-equity investment. Debt was approximately $400.7 million: $260.0 million of 5.875% notes due 2021, $45.0 million outstanding on the unsecured revolver, and $95.7 million of mortgage debt. The company reported compliance with applicable debt covenants.
Material changes and transactions
- In August, CareTrust issued 16.33 million shares at $10.50 per share, receiving approximately $163.5 million net proceeds.
- In August, it replaced its secured revolving facility with a $300 million unsecured revolving facility, maturing in 2019 with two six-month extension options. $45 million was drawn at quarter-end; additional borrowing capacity is subject to facility terms and covenants.
- On October 1, 2015, after quarter-end, CareTrust acquired the 14-facility Liberty portfolio in Ohio for approximately $177 million including estimated transaction costs. The acquisition was funded primarily with equity-offering proceeds and partly with a revolver draw. The new 15-year triple-net lease is expected to generate initial annual rent of approximately $17 million.
Outlook, commentary and risks
- Management expected 2015 rental revenue of approximately $66 million, including anticipated Liberty-related rent, G&A of approximately $7.6–$8.4 million, depreciation and amortization of approximately $24 million, and interest costs of approximately $25.4 million. These are management estimates, not a guarantee; the filing gives no earnings-per-share guidance.
- Management believed cash, operating cash flow and revolver availability would be sufficient for operations, scheduled debt service and dividends for at least 12 months. It intended to pursue further acquisitions as suitable opportunities and financing allowed. Dividends remain at the board’s discretion.
- Ensign remained the major tenant and leased 94 facilities; the company derived a majority of revenue from Ensign. A default under any Ensign Master Lease would trigger defaults under all those leases. This concentration exposes CareTrust to Ensign’s ability to meet lease obligations.
- Interest-rate exposure includes $45 million drawn on the variable-rate revolver and approximately $49.2 million of floating-rate mortgage debt; another mortgage tranche was to convert to floating rates after June 2016. A 100-basis-point increase would have raised nine-month interest expense by an estimated $0.7 million, assuming unchanged debt. CareTrust had no interest-rate swaps outstanding.
- Other risks include tenant compliance and lease renewal, acquisition availability and execution, access to capital, debt refinancing, REIT qualification, and healthcare and real-estate regulation. Ensign’s 2013 DOJ settlement and corporate integrity agreement impose certain continuing operational obligations on CareTrust, but the filing says CareTrust has no liability for the underlying investigation. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Ensign’s share of rent and its capacity to perform under the master leases, including the cross-default exposure.
- Liberty acquisition closing economics, actual rent commencement and performance under the Pristine lease.
- Revolver availability, borrowing-base and covenant headroom, and refinancing needs for the mortgage debt maturing in 2017.
- Whether management’s 2015 revenue, expense and interest-cost estimates are achieved, and how acquisition funding affects leverage and per-share results.
- REIT distribution and qualification requirements, and the sustainability of the $0.16 quarterly dividend.