CareTrust REIT, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. CareTrust is a healthcare-property REIT formed in the June 2014 spin-off from The Ensign Group. The 2014 comparison is based on predecessor carve-out statements and is not fully comparable to post-spin-off results.
Business context and financial results
At quarter-end, CareTrust owned and leased 100 skilled nursing, assisted living and independent living facilities, plus operated three independent living facilities. It also held a $7.8 million preferred-equity investment. Ensign leased 94 facilities and generated most of CareTrust’s revenue.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $17.0 million | $12.9 million |
| Net income (loss) | $2.0 million | $(0.4) million |
| Diluted earnings (loss) per share | $0.06 | $(0.02) |
| Net cash from operating activities | $11.1 million | $4.3 million |
| Cash at quarter-end | $13.6 million | $0.9 million |
- Revenue increased 32%, primarily from $3.0 million of incremental rent following the spin-off and $0.8 million from post-spin-off investments. Rental income was $14.8 million, including $14.0 million from Ensign.
- Total expenses were $14.9 million. Interest expense rose 77% to $5.9 million, mainly because of higher net borrowings after the spin-off; depreciation and amortization declined 10% to $5.6 million.
- Net income represented approximately 12% of revenue. The filing does not present a separate operating-margin measure.
- Operating cash flow increased by $6.7 million year over year, with management citing higher net income and a $4.4 million favorable change in operating assets and liabilities. Investing used $18.1 million, including the Bethany facility acquisition; financing used $4.6 million, including $3.9 million of dividends paid.
Balance sheet, debt and liquidity
- At March 31, 2015, total assets were $482.8 million, including net real estate investments of $448.8 million. Total liabilities were $372.0 million and equity was $110.8 million.
- Total debt was $357.5 million: $260.0 million of 5.875% senior unsecured notes due 2021 and $97.5 million of mortgage debt. The mortgage balance includes floating-rate exposure; weighted-average interest rate was approximately 5.8%.
- No revolving-credit borrowings were outstanding. Although the facility has a stated $150 million capacity, $84.2 million was available at quarter-end under borrowing-base requirements. The company reported compliance with applicable debt covenants.
- Cash declined from $25.3 million at year-end 2014 to $13.6 million. Management believed cash, expected operating cash flows and credit availability would cover operations, scheduled debt service and dividend requirements for at least 12 months.
- The board declared a quarterly cash dividend of $0.16 per share, payable April 15, 2015. The company stated that dividends are discretionary, while REIT qualification generally requires distributing at least 90% of REIT taxable income annually.
Changes, outlook and risks
- Compared with Q1 2014, the company moved from a net loss to net income, while interest expense rose substantially. The comparison is affected by the 2014 spin-off, including the prior-period allocation of $1.9 million of Ensign corporate costs; no such allocation was recorded in 2015.
- Management estimated 2015 general and administrative expense of $6.2–$6.9 million, depreciation and amortization of approximately $23.0 million, and independent-living revenue and operating expense of approximately $2.6 million and $2.3 million, respectively. It also estimated annual interest costs of approximately $24.0 million. These are estimates, not earnings guidance.
- Ensign Master Lease annual rent was $56.0 million for each of the first two lease years; CPI-based escalators, capped at 2.5% and with no decrease, begin in the third year. The leases are triple-net and guaranteed by Ensign. A default at one facility under a master lease can trigger defaults across the master leases.
- Key risks include concentration in Ensign, tenant ability to meet lease obligations, healthcare regulation and operator compliance, acquisition and capital-market access, refinancing, interest-rate exposure, and maintaining REIT status. A 100-basis-point rate increase was estimated to raise quarterly interest expense on the floating-rate mortgage portion by $0.1 million.
- Ensign’s 2013 $48 million DOJ settlement and five-year corporate integrity agreement relate to Ensign’s healthcare operations. CareTrust reported certain continuing operational obligations under the agreement but no liability for the DOJ investigation. CareTrust reported no material legal proceedings.
- After quarter-end, CareTrust acquired a Washington skilled nursing facility for $9.1 million. A director who was also Ensign’s CEO resigned from CareTrust’s board on April 15, 2015.
Important facts for investors to verify
- Ensign’s capacity to pay rent and the extent of CareTrust’s continuing reliance on this single major tenant.
- Actual borrowing availability under the revolving facility and compliance with borrowing-base and financial covenants.
- Floating-rate mortgage exposure, refinancing needs and the timing and terms of mortgage maturities.
- Whether operating cash flow can sustain acquisitions, debt service and dividends as cash balances change.
- Performance of the Bethany acquisition and subsequent Mira Vista acquisition, and progress of the preferred-equity development investment.
- Actual results against management’s 2015 expense estimates and continued qualification as a REIT.