CareTrust REIT, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. CareTrust is a healthcare-property REIT, primarily leasing properties to third-party operators under triple-net leases. At quarter-end it owned and leased 211 facilities with 21,583 beds and units, operated three independent-living facilities, and held other real estate investments of $44.8 million.
Financial results and position
| Metric | Q3 2019 / September 30, 2019 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $33.3 million | Q3 2018: $39.5 million |
| Net income (loss) | $(10.1) million; diluted EPS $(0.11) | Q3 2018: $14.5 million; diluted EPS $0.18 |
| Nine-month revenue | $119.2 million | 2018: $116.6 million |
| Nine-month net income | $25.7 million; diluted EPS $0.28 | 2018: $42.4 million; diluted EPS $0.54 |
| Operating cash flow, nine months | $95.2 million | 2018: $72.4 million |
| Cash and cash equivalents | $5.7 million | December 31, 2018: $36.8 million |
| Debt | $565.0 million principal; $559.4 million carrying value | December 31, 2018: $495.0 million principal |
| Total assets / equity | $1.525 billion / $927.5 million | December 31, 2018: $1.292 billion / $768.2 million |
Cash used in investing was $326.0 million, principally for property acquisitions and real estate loans; financing provided $199.8 million, including equity proceeds and net borrowing. Cash dividends paid in the first nine months were $59.2 million. The declared quarterly dividend was $0.225 per share. The $600 million revolving facility had $65 million drawn, leaving approximately $535 million of stated commitment before conditions and any other usage. The company reported compliance with applicable debt covenants.
Material changes and unusual items
- Q3 revenue declined 16% year over year and the company recorded a net loss, primarily reflecting a $12.1 million rental-income collectibility adjustment and $16.7 million of real estate impairment. The impairment comprised approximately $7.8 million related to three Ohio facilities sold and $8.8 million on six Metron facilities classified as held for sale.
- The collectibility reassessment covered five operators and reversed $7.8 million of contractual rent, $3.5 million of straight-line rent, and $0.8 million of property taxes. Recoveries may be recognized if collection later becomes probable.
- A $1.1 million provision for loan losses was recorded for remaining contractual obligations under a bridge loan to Priority Life Care.
- Nine-month revenue increased 2%, supported by acquisitions and rent increases, but net income fell 39%, reflecting impairments, the collectibility adjustment, higher depreciation, and other expenses.
- Accounting for leases changed on January 1, 2019. Tenant tax recoveries may now be included in rental income or excluded from revenue depending on who pays the third party; therefore, year-over-year revenue and property-tax expense presentations are not fully comparable.
- Real estate investments, net, rose to $1.404 billion from $1.216 billion at year-end. The company acquired 20 properties for about $303.9 million during the nine months, generating initial annual cash rent of about $27.2 million.
Outlook, commentary, and risks
Management stated that available cash, expected operating cash flow, and access to the ATM program and credit facility should fund operations, scheduled debt service, and dividend plans for at least the next 12 months. It intends to pursue further acquisitions when suitable opportunities and financing are available. No specific earnings or financial guidance was provided.
- On October 1, Ensign spun off Pennant. CareTrust amended its Ensign leases and entered into a 15-year Pennant master lease with initial annual cash rent of approximately $7.8 million. Ensign’s contractual rent decreased by a corresponding amount; Ensign continued to guarantee both sets of facilities, subject to a possible release for Pennant facilities if specified coverage conditions are met. As of October 1, Ensign and Pennant represented 33.2% and 4.9% of contractual rental income, respectively.
- From January 1 through November 7, 2019, CareTrust reported acquisitions totaling approximately $326.7 million, expected to generate initial annual cash revenue of $29.1 million at an initial blended yield of about 8.9%. Two additional facilities acquired in October cost approximately $22.8 million.
- Operator concentration is significant: Ensign generated 50% of Q3 and 40% of nine-month rental income, excluding operating-expense reimbursements. Tenant ability to pay, maintain operations, and meet lease obligations is a key risk.
- Variable-rate debt exposes the company to interest-rate risk. Management estimated a 100-basis-point increase would have added approximately $2.0 million to interest expense for the nine-month period. The filing also notes uncertainty about LIBOR after 2021; no interest-rate swaps were in place.
- Other risks include access to capital, acquisition availability, tenant and regulatory performance, lease renewals, REIT qualification, and real-estate valuation and liquidity. Ordinary-course claims and lawsuits were disclosed, but no material legal proceeding was identified. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether rent collectibility at the five affected operators improves, and whether any previously reversed rental income is recovered.
- Progress and sale proceeds for the six Metron facilities held for sale, and the realized outcome of the Ohio disposition and related CommuniCare loan.
- Tenant credit and portfolio coverage following the Pennant spin, including the conditions for any release of Ensign’s guarantee.
- Debt capacity, variable-rate exposure, covenant headroom, and funding needs for planned acquisitions and dividends.
- Comparability of reported revenue and expenses after adoption of the new lease accounting standard; confirm cash rents and tenant recoveries separately.
- Whether acquisitions, operating cash flow, and financing access support the stated 12-month liquidity outlook and dividend plans.