CareTrust REIT, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; financial statements are unaudited. CareTrust is a healthcare real estate REIT that primarily owns properties leased to third-party operators. At quarter-end it had 190 leased facilities, three company-operated independent living facilities, and other real estate investments. The portfolio comprised 18,693 operational beds and units, excluding the separately reported 264 units at its independent living facilities.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $39.5 million | $32.9 million | $116.6 million | $96.4 million |
| Net income | $14.5 million | $11.3 million | $42.4 million | $23.6 million |
| Diluted EPS | $0.18 | $0.15 | $0.54 | $0.33 |
| Calculated net margin | 36.7% | 34.3% | 36.4% | 24.5% |
| Operating cash flow | Not separately provided | Not separately provided | $72.4 million | $66.9 million |
| Dividends declared per share | $0.205 | $0.185 | $0.615 | $0.555 |
- Q3 rental income rose 20% to $35.3 million; nine-month rental income increased 22% to $103.9 million. Management attributed growth mainly to property investments, rent increases and straight-line rent.
- Q3 interest expense increased 22% to $6.8 million, primarily due to higher average revolver borrowings and LIBOR rates. Nine-month interest expense increased 20% to $21.2 million.
- At September 30, total assets were $1.24 billion, total liabilities $520.3 million and equity $720.1 million. Cash and cash equivalents were $15.7 million.
- Debt principal totaled $490 million: $300 million of 5.25% notes due 2025, a $100 million term loan due 2023, and $90 million drawn on a $400 million revolving facility due 2019, subject to extension options. Debt carrying value was $484.6 million.
- Nine-month investing cash outflow was $72.0 million, including $75.6 million for real estate acquisitions; financing cash inflow was $8.4 million. Cash increased $8.8 million from year-end 2017.
Changes versus the prior comparable period
- Nine-month net income rose about 79%, while revenue rose about 21%. The comparison benefited from the absence of prior-year charges: an $11.9 million debt-extinguishment loss and $0.9 million real estate impairment. The prior period also included a $3.5 million gain on disposition of another real estate investment; 2018 included a $2.1 million gain on real estate sales.
- Rental income growth reflected acquisitions made after the comparable prior-period dates, as well as existing-lease escalations. Depreciation and amortization also increased with the expanded property base.
- The company sold three Idaho assisted living facilities for $13.0 million, recognizing a $2.1 million gain. It acquired eight properties in the first nine months for $77.4 million. Management reported additional October acquisitions; its November 5 update described ten 2018 acquisitions through that date for approximately $89.4 million.
- CareTrust issued 7.8 million shares through its at-the-market program in the first nine months for $132.3 million gross proceeds, increasing shares outstanding and supporting its funding capacity.
Outlook, risks and unusual items
- Management said cash, expected operating cash flow, remaining ATM capacity and Credit Facility availability should fund operations, scheduled debt service and planned dividends for at least the next 12 months. It intends to pursue acquisitions and development as suitable opportunities and financing become available; no specific earnings or revenue guidance was provided.
- At September 30, approximately $103.8 million remained available under the ATM program. The revolver had $90 million drawn against $400 million of commitments, before considering covenant or other borrowing conditions. Management reported compliance with applicable debt covenants.
- Operator concentration is material: Ensign leased 92 facilities and represented $59.1 million, or 42%, of annualized rental income. Tenant ability to meet lease obligations, renew leases and comply with healthcare regulations is a key risk.
- Accounts and other receivables included a $10.4 million reserve relating to former Pristine properties. Pristine’s nine remaining properties transitioned to Trio and Hillstone in May under new leases with approximately $10 million in aggregate annual base rent. Two OnPointe properties were also transferred to existing operators.
- Variable-rate debt exposes the company to higher interest costs. Management estimated a 100-basis-point rate increase would have added approximately $1.4 million to nine-month interest expense, assuming unchanged debt balances; no interest-rate swaps were in place.
- Management was evaluating the impact of lease accounting standard ASC 842, expected to be adopted January 1, 2019. It planned to use the practical expedient and optional transition method described in the filing.
- The company stated that ordinary-course legal claims were not expected to have a material adverse effect and reported no material legal proceedings. It also disclosed continuing operational obligations connected to Ensign’s U.S. government settlement and compliance agreement, while stating it had no liability for the underlying DOJ investigation.
Investor verification priorities
- Review Ensign’s operating and financial condition, lease coverage and the concentration represented by 42% of annualized rental income.
- Assess the collectability and recovery prospects of the Pristine-related receivables and the adequacy of the associated reserve.
- Verify debt maturities, revolver availability, covenant headroom and exposure to rising variable interest rates.
- Separate recurring operating performance from prior-period debt and impairment charges and current-period property-sale gains.
- Evaluate the effects of ATM share issuance on per-share results and dividend coverage, and monitor post-quarter acquisitions and their funding.