CareTrust REIT, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unless noted, amounts below are in millions of dollars. CareTrust became independent in a June 1, 2014 spin-off from The Ensign Group. Prior-period financials are carve-out results that include Ensign allocations and may not represent stand-alone performance or be fully comparable.
Business context
CareTrust owns healthcare real estate and primarily leases it to operators on a triple-net basis. At September 30, the portfolio comprised 97 skilled nursing, assisted living and independent living facilities: 94 properties leased to Ensign and three independent living facilities operated by CareTrust. The Ensign-leased facilities had 10,121 operational beds and units; the operated facilities had 264 units.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $15.884 | $12.558 | $42.820 | $35.946 |
| Rental income | $14.000 | $10.713 | $37.228 | $30.449 |
| Net income (loss) | $1.967 | ($0.273) | ($8.773) | $0.793 |
| Basic/diluted EPS | $0.09 | ($0.01) | ($0.39) | $0.04 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $17.351 | $21.904 |
- Q3 expenses were $13.917 million, including $5.943 million interest expense and $5.362 million depreciation and amortization. Nine-month expenses were $51.540 million, including $15.722 million interest, $17.631 million depreciation and amortization, and $4.067 million loss on extinguishment of debt.
- At September 30, assets were $517.943 million, including $415.021 million net real estate and $88.845 million cash. Total liabilities were $368.318 million and equity was $149.625 million.
- Debt outstanding was $358.867 million: $260 million of 5.875% senior unsecured notes due 2021 and approximately $98.9 million of mortgage notes. The $150 million revolving facility had no borrowings; reported availability under borrowing-base requirements was $84.2 million. The company reported compliance with applicable debt covenants.
- Nine-month investing cash use was $19.333 million; financing provided $89.932 million. Cash increased $87.950 million from $0.895 million at the start of the period.
Changes versus prior comparable periods
- Q3 revenue rose $3.326 million (about 26%), primarily reflecting incremental rent established after the spin-off. Net income improved from a $0.273 million loss to $1.967 million income.
- Nine-month revenue rose $6.874 million (about 19%), including $4.2 million of incremental post-spin-off rent and $2.6 million from ten properties acquired after January 1, 2013. Despite revenue growth, the period shifted to a net loss, primarily amid higher interest expense, spin-off-related general and administrative costs, and debt-extinguishment charges.
- Nine-month operating cash flow declined $4.553 million. Management attributed the decrease principally to higher borrowing costs, spin-off-related costs and debt prepayment penalties, partly offset by higher rental income.
Outlook, notable items and risks
- Master Lease annual rent was $56 million for each of the first two years; starting June 1, 2016, rent is scheduled to increase annually by the lesser of CPI or 2.5%, with no negative adjustment. Future minimum Master Lease payments totaled $872.529 million as of September 30.
- Management expected first-year annualized general and administrative expense of $4.5–$5.0 million, excluding noncash stock compensation, incentive compensation and acquisition costs; expected noncash stock compensation was about $0.7 million. The three operated facilities were expected to generate about $2.5 million annual net revenue and incur about $2.2 million annual operating expense.
- Management stated available cash, expected operating cash flow and revolving-credit availability should cover operations, scheduled debt service and dividend requirements for the twelve months following the spin-off. Acquisitions and future investment may require cash, additional borrowing or securities issuance; access to financing on acceptable terms is not assured.
- On October 17, 2014, the board declared a $132 million special “purging” dividend, approximately $5.88 per share, payable December 10. Holders could elect cash or shares; aggregate cash distribution was capped at $33 million, with the balance payable in shares. The dividend was intended to clear accumulated earnings and profits ahead of the planned 2014 REIT election.
- Interest-rate exposure includes approximately $50.4 million of floating-rate GECC debt. The company had no interest-rate swaps outstanding at quarter-end; it estimated a 100-basis-point increase would raise quarterly interest expense on that floating-rate portion by about $0.1 million.
- Concentration is significant: substantially all revenue came from Ensign, which leases 94 facilities and guarantees the Master Leases. A default under one Master Lease triggers default under all Master Leases. CareTrust also noted Ensign’s ability to perform is a key risk.
- Ensign’s 2013 DOJ settlement and five-year corporate integrity agreement remain relevant: CareTrust has certain continuing operational obligations under the compliance program but stated it has no liability for the investigation. No material legal proceedings were reported.
Key facts for investors to verify
- Ensign’s operating performance, ability to meet lease obligations, and the implications of the cross-default provisions across the Master Leases.
- The dividend’s final cash-versus-stock allocation, resulting share issuance and dilution, and the cash remaining after payment.
- Debt-service capacity and refinancing exposure, particularly the floating-rate GECC balance, 2017 mortgage maturity and 2021 notes.
- Whether post-spin-off standalone costs, rent escalators, and acquisition activity deliver results consistent with management’s stated expectations; historical carve-out results are not necessarily indicative.
- CareTrust’s successful qualification and continued compliance as a REIT, including required distributions and applicable debt covenants.