CareTrust REIT, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; the filing also provides selected unaudited quarterly data. Amounts below are U.S. dollars.
Business context
CareTrust is a healthcare-property REIT that primarily leases skilled nursing, multi-service campus, assisted-living and independent-living properties to operators under long-term triple-net leases. At year-end, it had 194 leased properties and operated three independent-living facilities; its real estate portfolio spanned 27 states. Ensign was the largest tenant, accounting for 41% of annualized rental revenue excluding tenant reimbursements.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $156.9 million | $133.0 million | +18% |
| Rental income | $140.1 million | $117.6 million | +19% |
| Net income | $57.9 million | $25.9 million | +124% |
| Diluted EPS | $0.72 | $0.35 | Up $0.37 |
| FFO | $101.5 million | $62.3 million | +63% |
| FAD | $105.0 million | $66.4 million | +58% |
| Net cash from operations | $99.4 million | $88.8 million | +12% |
Net income was approximately 36.9% of revenue, versus 19.5% in 2017. The comparison was affected by significant 2017 expenses, including an $11.9 million debt-extinguishment loss and a $10.4 million reserve for advances and deferred rent; 2017 also included a $3.5 million gain on disposition of another real estate investment. 2018 included a $2.1 million gain on the sale of three Idaho assisted-living facilities.
Rental-income growth primarily reflected $19.2 million from investments made after January 1, 2017, rent increases and straight-line rent, partly offset by property sales and lower cash rents. Interest expense rose 15% to $27.9 million, primarily due to higher average borrowings and LIBOR rates. Year-end occupancy at leased facilities was 77% for SNFs and multi-service campuses and 84% for ALFs/ILFs; company-operated ILFs were 83% occupied.
Operating cash flow was $99.4 million; investing cash outflow was $115.1 million and financing cash inflow was $45.6 million. Cash and cash equivalents were $36.8 million at year-end. Total debt was $495.0 million principal ($489.8 million carrying value), comprising $300 million of 5.25% senior notes due 2025, a $100 million term loan and $95 million drawn on the revolving facility. Total assets were $1.29 billion and equity was $768.2 million. The company reported compliance with applicable debt covenants at year-end.
Cash dividends declared increased to $0.82 per common share from $0.74 in 2017. FFO and FAD are non-GAAP supplemental measures and should not be treated as substitutes for GAAP income or operating cash flow.
Material changes, outlook and risks
- CareTrust issued 10.3 million shares through its at-the-market program in 2018 for $182.3 million gross proceeds. Shares outstanding increased to 85.9 million at year-end from 75.5 million a year earlier; additional shares were sold in January 2019.
- During 2018, the company acquired 12 properties for approximately $113.3 million, with initial annual cash rent of approximately $10.0 million. It also sold three assisted-living facilities for $13.0 million.
- Pristine’s remaining nine facilities were transitioned to new operators in May 2018 under new master leases with approximately $10.0 million aggregate annual base rent. Two OnPointe facilities were also transferred to existing CareTrust tenants.
- On February 8, 2019, the company amended and restated its credit facility, providing a $600 million revolving facility and a $200 million term loan. As of February 13, 2019, the term loan was fully drawn and the revolver had no borrowings.
- Management said cash, expected operating cash flow, equity-program capacity and the new revolver were expected to fund operations, scheduled debt service and dividend plans for at least the next 12 months. No quantified earnings or FFO guidance was provided.
- In January 2019, CareTrust agreed to acquire 12 properties for approximately $211 million, subject to closing conditions and third-party approvals. The anticipated initial lease yield was approximately 8.9%; completion was not assured.
- Key risks include tenant payment and operating performance, particularly Ensign’s 41% revenue concentration; changes to Medicare and Medicaid reimbursement and healthcare regulation; interest-rate and refinancing exposure; acquisition execution; and REIT qualification and distribution requirements. The company also cited geographic exposure, including natural-disaster risk.
The company reported no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls and internal control over financial reporting. Its auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Ensign and other tenants’ latest lease coverage, liquidity and ability to meet rent, indemnity and property obligations.
- Completion, financing, operator transitions and actual lease economics for the proposed $211 million acquisition, as well as returns on recent investments.
- Current debt balances, interest-rate exposure, covenant headroom and the terms and availability of the amended credit facility.
- Whether operating cash flow and FAD support the dividend and planned acquisitions, considering substantial equity issuance and dilution.
- Collectability of tenant receivables: year-end receivables included $10.4 million reserved for former Pristine properties, with additional receivables disclosed.
- Any updates to occupancy, reimbursement policy, tenant credit conditions, REIT compliance and the effects of the new lease-accounting standard.