CareTrust REIT, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars; financial figures are in millions except per-share data.
Business context
CareTrust is a healthcare-property REIT that primarily owns and leases skilled nursing, assisted living, and independent living facilities under long-term triple-net leases. At year-end it had 216 leased properties and one company-operated independent living facility, across 28 states. It also held one preferred-equity investment and two mortgage loans receivable. Most property operating costs are the tenants’ responsibility under the leases.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $163.4 | $156.9 |
| Rental income | $155.7 | $140.1 |
| Net income | $46.4 | $57.9 |
| Diluted EPS | $0.49 | $0.72 |
| FFO (non-GAAP) | $113.0 | $101.5 |
| FAD (non-GAAP) | $117.8 | $105.0 |
| Net cash from operating activities | $126.3 | $99.4 |
| Cash and cash equivalents, year-end | $20.3 | $36.8 |
Net income margin, calculated as net income divided by total revenue, declined to approximately 28.4% from 36.9%; the filing does not present this margin as a reported measure. Revenue rose 4%, while net income fell 20% and diluted EPS fell 32%. Rental income increased 11%, driven mainly by acquisitions and rent increases, but was reduced by collectibility adjustments. FFO and FAD increased approximately 11% and 12%, respectively; both are non-GAAP measures and should not be treated as substitutes for GAAP earnings or operating cash flow.
Fourth-quarter 2019 revenue was $44.2 million and net income was $20.7 million, compared with $40.4 million and $15.5 million, respectively, in fourth-quarter 2018. Third-quarter 2019 included a $10.1 million net loss, primarily reflecting impairment charges.
Total assets were $1.519 billion and total equity was $927.6 million at year-end. Debt principal totaled $560 million: $300 million of 5.25% senior notes due 2025, a $200 million term loan due 2026, and $60 million drawn on a $600 million revolving facility. The company reported compliance with applicable debt covenants. Operating cash flow increased by $26.9 million; investing activities used $316.0 million, primarily for property acquisitions and real estate loans, while financing activities provided $173.2 million. The filing states that cash, expected operating cash flow, and available financing were expected to cover operations, scheduled debt service, and dividend plans for at least the next 12 months.
Dividends declared were $0.90 per common share for 2019, up from $0.82 in 2018. Cash dividends paid were $80.6 million. The REIT distribution requirement is based on taxable income, not GAAP net income, and future dividends remain subject to board approval, cash availability, and debt restrictions.
Material changes and unusual items
- CareTrust adopted new lease accounting standards on January 1, 2019. Tenant tax recoveries and collectibility assessments were presented differently, affecting comparability of revenue categories between years.
- Under the new collectibility assessment, the company reduced 2019 rental income by $11.8 million for five operators, including reversals of previously recognized rent and related amounts.
- It recorded $16.7 million of real estate impairment charges: approximately $7.8 million on three Ohio skilled nursing facilities sold in September and $8.8 million on six Metron facilities classified as held for sale. The Metron facilities were sold in February 2020 for $36.0 million, largely financed by a short-term mortgage loan from CareTrust.
- A $1.1 million provision was recorded for amounts under a Priority Life Care bridge loan deemed uncollectible. The company also reported a $3.8 million rental-income adjustment associated with the Trillium lease restructuring.
- After Ensign’s October 2019 separation of Pennant, 11 facilities moved to a new 15-year Pennant master lease with initial annual cash rent of approximately $7.8 million; Ensign guaranteed that lease, subject to potential release if specified coverage conditions are met.
- CareTrust issued 6.64 million shares in an April public offering, generating approximately $149 million net, and sold 2.46 million shares through its prior ATM program for $47.9 million gross. It reported no sales under its new $300 million ATM program during 2019.
Outlook, commentary, and principal risks
Management described continued growth through acquisitions, diversification by operator, geography, and property type, and maintaining balance-sheet flexibility. From January 2019 through February 20, 2020, CareTrust acquired 18 skilled nursing facilities, four multi-service campuses, and two assisted living facilities for approximately $352.8 million, expected to produce about $31.4 million of initial annual cash revenue at an approximately 8.9% blended yield. These are expectations, not a formal earnings forecast.
- Tenant and operator credit is a central risk: Ensign represented 38% of 2019 rental income, while PMG represented 15%. On an annualized run-rate basis at year-end, Ensign and Pennant represented 32% and 5% of contractual rent, respectively. Tenant distress, regulatory problems, or lease defaults could impair collections and require costly property transitions.
- Tenant revenues depend substantially on Medicare, Medicaid, and other reimbursement, and on staffing, occupancy, and compliance with extensive healthcare regulation. The filing discusses potential reimbursement reductions and the proposed Medicaid Fiscal Accountability Rule.
- Interest-rate exposure includes variable-rate debt. Management estimated that a 100-basis-point increase would add approximately $2.6 million to annual interest expense at year-end debt levels. The company also cited uncertainty around the planned phaseout of LIBOR.
- Other risks include real estate impairments and valuation estimates, geographic exposure to California, Texas, and Louisiana, natural disasters, refinancing and covenant constraints, REIT qualification and distribution requirements, and the availability and cost of acquisition financing.
- No material legal proceedings were reported. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Review tenant-level rent coverage, collection status, and subsequent payment trends, especially for operators affected by the 2019 collectibility adjustments.
- Verify the status and repayment of short-term mortgage loans, including the CommuniCare loan and the loan connected with the February 2020 Metron sale, and the outcome of the Manteca foreclosure process.
- Assess operator concentration and the financial strength of Ensign, Pennant, and PMG, including the terms and continuing scope of Ensign’s guarantees.
- Check available revolver capacity, covenant headroom, variable-rate exposure, and refinancing needs against acquisition plans and dividend commitments.
- Reconcile reported revenue growth with the lease-accounting presentation change, collectibility write-offs, impairments, and non-GAAP FFO/FAD calculations.