CareTrust REIT, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. CareTrust is a healthcare and seniors-housing REIT that primarily owns properties leased to third-party operators, generally on a triple-net basis. At quarter-end, it owned 161 leased facilities with 15,894 beds and units, operated three independent-living facilities with 264 units, and held $5.2 million of preferred equity investments.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $32.8 million | $25.7 million | $63.4 million | $49.3 million |
| Net income | $2.0 million | $7.6 million | $12.3 million | $13.1 million |
| Diluted EPS | $0.03 | $0.13 | $0.17 | $0.25 |
| Operating cash flow | — | $44.9 million | $28.1 million |
- Q2 revenue increased 28%; six-month revenue rose 29%. Rental income grew 25% in Q2 and 28% in the first half, primarily from property investments made since the comparable 2016 periods.
- Net income fell despite revenue growth, principally because Q2 2017 included an $11.9 million debt-extinguishment loss and a $0.9 million real-estate impairment. Six-month results also included those items, partly offset by a $3.5 million gain on disposition of a preferred-equity investment.
- At June 30, total assets were $1.030 billion, including net real estate investments of $972.8 million. Cash was $35.1 million, compared with $7.5 million at year-end 2016. Total equity was $608.0 million.
- Debt carrying value was $393.5 million: $294.0 million of senior notes and $99.5 million of term debt. The $400 million revolving facility was undrawn. The company reported compliance with applicable debt covenants.
- First-half investing cash outflow was $94.3 million, including $96.6 million of real-estate acquisitions. Financing cash inflow was $77.0 million, including $170.5 million of net common-stock proceeds. Dividends paid were $24.5 million; declared dividends were $0.185 per share per quarter ($0.37 for the first half).
Material changes and transactions
- In May, the company issued $300 million of 5.25% senior notes due 2025, using proceeds to redeem $260 million of 5.875% notes due 2021 and repay revolver borrowings. The redemption generated the $11.9 million extinguishment loss. Interest expense increased 14% in Q2 and 7% for the first half versus 2016.
- The company sold its Signature preferred-equity investment in May, recovering its $7.5 million principal and receiving contractual return and an additional $3.5 million payment recognized as a gain. Two Cascadia preferred-equity investments remained outstanding.
- During the first half, the company sold about 10.6 million shares through its ATM program for $173.8 million gross proceeds. A new $300 million ATM program began in May; approximately $236.1 million remained available at June 30.
- From January 1 through July 31, the company acquired 14 properties for approximately $106.7 million, with initial annual cash rents of approximately $9.8 million and an initial blended yield of approximately 9.2%. Three additional properties were acquired in July for approximately $15.5 million, with stated initial annual rents of $1.4 million.
Outlook, risks and unusual items
- Management said available cash, expected operating cash flows, the ATM program and undrawn revolver were expected to fund operations, scheduled debt service and dividends for at least the next 12 months. It plans to pursue additional acquisitions when suitable opportunities and financing are available. No specific earnings or revenue guidance was provided.
- Management identified tenant performance and lease obligations, acquisition availability, access to capital, interest rates, refinancing, REIT qualification and healthcare regulation among key risks. A 100-basis-point increase in variable rates was estimated to raise first-half interest expense by $0.5 million.
- Ensign leased 92 facilities; annualized rent under its master leases was $57.7 million. Pristine leased 16 facilities and generated annual lease revenue of $18.6 million. The company reported approximately $3.0 million of net pre-fundings for Pristine property taxes and franchise fees and permitted Pristine to defer scheduled June and July impound deposits; management expected Pristine to meet rent obligations.
- La Villa Rehab & Healthcare Center was deemed economically unviable; CareTrust transferred the property to Ensign and recorded a $0.9 million write-off. Contractual rent was not reduced, and licensed beds were to be transferred to another Ensign-leased facility.
- The filing reported no material legal proceedings or material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether tenant operating performance—especially at Ensign and Pristine—supports continued rent payments and lease escalators.
- How much of the reported revenue and cash flow growth is attributable to acquisitions, and whether acquired assets achieve expected yields and rent collection.
- The ongoing effect of the 2025 notes refinancing on interest expense, debt maturities and covenant capacity; the filing does not provide a clear leverage ratio.
- Whether the ATM share issuance and future capital needs affect per-share results and dividend coverage.
- Pristine’s deferred impound deposits, the recovery of CareTrust’s pre-fundings and the expected completion and proceeds of excess-bed-right sales.
- The extent to which first-half earnings depended on the one-time investment gain and other unusual items rather than recurring property operations.