Business context and reporting period
CareTrust REIT, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. The company owns, acquires and leases healthcare real estate, primarily skilled nursing facilities, under triple-net leases. It also operates three independent living facilities. CareTrust became independent through its June 2014 spin-off from The Ensign Group; pre-spin-off financial statements are carve-out results and may not represent stand-alone performance.
At year-end, the portfolio comprised 122 properties across 15 states, including 119 leased facilities and three company-operated independent living facilities, with 12,408 beds and units in total. CareTrust also held an $8.5 million preferred equity investment.
Financial and operating performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $75.0 million | $58.9 million |
| Net income (loss) | $10.0 million | ($8.1 million) |
| Diluted EPS | $0.26 | ($0.36) |
| FFO | $34.1 million | $14.9 million |
| FAD | $37.8 million | $16.6 million |
| Cash from operations | $40.3 million | $21.9 million |
| Cash used in investing | ($234.6 million) | ($53.6 million) |
| Cash at year-end | $11.5 million | $25.3 million |
FY 2015 net income was approximately 13.4% of revenue. FFO and FAD are non-GAAP measures defined by the company and are not substitutes for GAAP earnings or operating cash flow.
Rental income was $66.0 million, tenant reimbursements $5.5 million, company-operated independent living revenue $2.5 million, and interest and other income $1.0 million. Total assets were $673.2 million and total equity $262.3 million at year-end.
At December 31, 2015, debt principal was approximately $400.0 million: $260.0 million of 5.875% senior notes due 2021, $45.0 million drawn on the unsecured revolver, and approximately $95.0 million of secured mortgage debt. Debt’s balance-sheet carrying value was $393.9 million after deferred financing costs. The company reported compliance with its debt covenants. The filing does not provide a current ratio or other standard liquidity ratio.
Quarterly FY 2015 revenue increased from $17.0 million in Q1 to $22.6 million in Q4; Q4 net income was $5.0 million and diluted EPS was $0.10.
Material changes versus the prior comparable period
- Revenue increased 27% year over year; rental income rose $14.6 million, mainly from post-spin-off rent and acquisitions.
- The company moved from an $8.1 million net loss to $10.0 million net income. 2014 included a $4.1 million loss on extinguishment of debt and elevated spin-off-related general and administrative costs.
- Operating cash flow rose $18.3 million to $40.3 million. Investing outflow expanded substantially, primarily because of real estate acquisitions.
- In October 2015, CareTrust acquired 14 Ohio facilities for approximately $176.5 million and leased them to Pristine affiliates at initial annual rent of $17.0 million. The acquisition was principally funded by the August 2015 common-stock offering, which raised approximately $163.0 million net before offering costs.
- At year-end, Ensign leased 94 facilities and Pristine affiliates leased 14. Annualized rents disclosed after subsequent transactions were $56.0 million from Ensign and $17.0 million from Pristine; together they represented 84% of annualized revenue, excluding tenant reimbursements. Ensign accounted for 81% of 2015 revenue on the company’s stated basis.
- Quarterly cash dividends were raised to $0.16 per share in 2015, or $0.64 for the year. The 2014 $5.88-per-share special dividend was mainly stock, with $33.0 million paid in cash.
Outlook, commentary, risks and unusual items
Management expects to grow and diversify the portfolio through acquisitions, new tenant relationships and investments in healthcare and senior-housing properties. It reported that available cash, expected operating cash flow and credit-facility availability should fund operations, scheduled debt service and dividend requirements for at least 12 months. No formal earnings or acquisition guidance was provided. Future dividends remain subject to board approval, financial results, debt restrictions and REIT requirements.
Subsequent to year-end, on February 1, 2016, the company amended its credit facility, increased revolving commitments to $400.0 million, funded a $100.0 million unsecured term loan due 2023, and used approximately $95.0 million to repay and terminate the GECC mortgage loan. Following this refinancing, the filing disclosed approximately $445.0 million of debt and $315.0 million of remaining revolver availability. Also on February 1, CareTrust acquired nine Iowa facilities for approximately $32.7 million and a Texas assisted-living facility for approximately $4.9 million.
On February 5, 2016, Ensign arranged to close and decertify one Texas facility. Ensign remained obligated to pay the full indivisible master rent and property expenses for up to five years; CareTrust may remove the property and related licenses and Medicaid bed rights from the lease. Management characterized the plan as specific to that property and did not anticipate similar requests.
- Tenant and concentration risk: Rent depends heavily on Ensign and Pristine and their capacity and willingness to meet lease obligations. Lease nonrenewal, operator distress, regulatory action or reimbursement cuts could impair rent and dividends.
- Healthcare regulation: Tenants face Medicare and Medicaid reimbursement, licensing, inspection, fraud-and-abuse and compliance risks. CareTrust also has continuing training obligations under Ensign’s corporate integrity agreement.
- Financial and market risk: Debt service, variable interest rates, refinancing access, covenant restrictions and the ability to raise capital affect liquidity and growth. A 100-basis-point rate increase was estimated to add $0.9 million of annual interest expense under the debt balances and assumptions described in the filing.
- REIT and spin-off tax risks: Loss of REIT status could create substantial taxes; uncertainty also remains around accumulated earnings and profits and potential tax indemnification obligations tied to the spin-off.
- Other risks: Acquisitions, illiquid and specialized properties, geographic exposure (notably Texas and California), natural disasters, environmental liabilities and uninsured losses may adversely affect results. The company reported no material legal proceedings, no off-balance-sheet arrangements and no receivable reserves at year-end.
Management concluded that disclosure controls and internal control over financial reporting were effective at December 31, 2015. The financial statements received an unqualified audit opinion; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Review Ensign’s and Pristine’s financial capacity, rent coverage and lease obligations, including the effect of the Texas facility closure and any future tenant changes.
- Reconcile year-end debt and liquidity with the February 2016 refinancing, subsequent acquisitions and remaining borrowing capacity; assess variable-rate exposure and covenant headroom.
- Assess acquisition economics and funding, especially the $176.5 million Liberty portfolio and the Iowa and Texas acquisitions completed after year-end.
- Evaluate whether recurring operating cash flow supports dividends, debt service and planned acquisitions; distinguish GAAP net income from FFO and FAD.
- Check REIT qualification, the accumulated earnings-and-profits determination, and any potential spin-off-related tax indemnification exposure.