CareTrust REIT, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results; dollar figures are in millions unless stated otherwise. CareTrust owns and leases healthcare real estate, primarily under triple-net leases, and also operates three independent-living facilities. At quarter-end it owned 149 leased facilities and operated three facilities, with 14,304 leased beds and units and 264 operated units.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $27.1 | $18.0 | $76.4 | $52.3 |
| Net income | $7.8 | $0.7 | $21.0 | $5.0 |
| Diluted EPS | $0.13 | $0.02 | $0.38 | $0.14 |
| Net margin | 28.9% | 4.0% | 27.4% | 9.6% |
| Dividends declared per share | $0.17 | $0.16 | $0.51 | $0.48 |
- Q3 rental income rose 53% to $24.2 million; nine-month rental income rose 48% to $67.9 million. Management attributed the growth primarily to property investments made after the comparable prior-year dates.
- Q3 interest expense fell 20% to $5.7 million; nine-month interest expense fell 9% to $17.4 million, primarily reflecting refinancing of secured debt, partly offset by higher borrowings and financing costs.
- Nine-month operating cash flow was $49.5 million, versus $29.0 million. Investing cash outflow was $191.2 million, mainly for real estate acquisitions; financing cash inflow was $142.1 million. Cash ended at $11.9 million.
- At September 30, total assets were $845.1 million, including net real estate investments of $809.1 million. Total liabilities were $482.3 million and equity was $362.8 million.
- Debt carrying amounts were $255.0 million of 5.875% senior notes due 2021, $99.4 million of term debt, and $103.0 million drawn on the revolving facility. The $400 million revolving commitment was subject to facility terms and covenants. The former $95.0 million secured mortgage balance was repaid in February 2016.
- Management reported compliance with applicable debt covenants. It stated that cash, expected operating cash flow and credit-facility availability should fund operations, scheduled debt service and dividends for at least the next 12 months.
Material changes and notable items
- During the nine-month period, CareTrust issued 9.78 million common shares in a public offering, receiving approximately $105.8 million net proceeds. It also sold 183,012 shares through its ATM program for $2.9 million gross proceeds; $122.2 million remained available under the program at quarter-end.
- The company acquired real estate and made preferred-equity investments. From January 1 through November 1, 2016, it reported acquiring 30 properties for approximately $186.6 million, including estimated capitalized transaction costs, and completing two preferred-equity investments totaling $4.5 million. These totals extend beyond the quarter-end.
- Quarter-end preferred-equity investments had a $13.6 million carrying value. Management said it stopped accruing interest on one investment, partly offset by income from two new investments.
- Ensign subsidiaries leased 94 of the company’s 152 facilities. Ensign leases are guaranteed by Ensign and include cross-default provisions; the company identifies Ensign as a source of a majority of rental income. Contracted future minimum rental revenues totaled $1.309 billion, subject to lease terms and tenant performance.
Outlook, risks and contingencies
- No specific earnings or acquisition guidance was provided. Management intends to pursue additional healthcare-property investments when suitable opportunities and adequate financing are available; it may use cash, borrowings or additional equity issuance.
- Variable-rate debt exposure was $203 million: $103 million under the revolver and $100 million under the term loan. The filing estimates a 100-basis-point rate increase would have raised nine-month interest expense by $1.5 million, assuming unchanged balances. No interest-rate swaps were in place.
- Key disclosed risks include tenant ability to meet lease obligations and comply with healthcare regulations, significant operator concentration, lease renewal or tenant replacement, availability and cost of capital, interest-rate changes, acquisition opportunities, and maintaining REIT status.
- CareTrust reported no material legal proceedings. The filing describes Ensign’s existing federal healthcare settlement and corporate integrity agreement; CareTrust has certain continuing operational obligations but stated it has no liability for the DOJ investigation. Management reported no material change in previously disclosed risk factors.
- The board declared a $0.17-per-share quarterly dividend payable October 14, 2016. Dividends remain at the board’s discretion; REIT status generally requires annual distribution of at least 90% of REIT taxable income.
Investor verification points
- Verify Ensign’s tenant credit and operating performance, and quantify the portfolio’s rental-income dependence on Ensign.
- Review preferred-equity investment collectability, especially the investment for which interest accrual ceased.
- Confirm actual revolver availability, covenant headroom, maturities and sensitivity to higher variable rates.
- Assess acquisition pricing, lease economics and the effect of share issuance and debt funding on per-share returns.
- Compare recurring cash generation with dividends and planned investment needs; reported net income includes noncash depreciation and amortization.