CareTrust REIT, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. CareTrust is a healthcare-focused REIT that primarily owns facilities leased to independent operators under triple-net leases. At quarter-end, it owned 222 facilities with 23,222 operational beds and units across 28 states.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $45.8 million | $44.3 million | +3.2% |
| Net income | $20.5 million | $19.3 million | +6.0% |
| Net income margin | 44.8% | 43.6% | +1.2 percentage points |
| Diluted EPS | $0.21 | $0.20 | +5.0% |
| Operating cash flow | $33.9 million | $36.5 million | −7.0% |
Rental income rose 7% to $45.2 million, primarily from post-2020 property investments and contractual rent increases. Interest and other income fell 60% to $0.5 million, mainly because mortgage and other loans were repaid; this was partly offset by interest income from a mezzanine loan. Interest expense declined 14% to $5.8 million, while general and administrative expense increased 27% to $5.1 million, including higher stock compensation and wages.
Balance sheet, debt and liquidity
- Total assets were $1.634 billion at March 31, 2021, up from $1.504 billion at year-end 2020. Real estate investments, net, were $1.577 billion.
- Cash and cash equivalents were $30.5 million. Total liabilities were $708.7 million.
- Debt principal totaled $670.0 million: $300.0 million of 5.25% senior notes due 2025, a $200.0 million term loan due 2026, and $170.0 million drawn on a $600.0 million revolving facility. Revolver availability was $430.0 million. The company reported compliance with applicable debt covenants.
- Quarter-end debt carrying value was $665.8 million, net of deferred loan fees. The filing reports no hedging swap agreements; a 100-basis-point increase in variable rates was estimated to raise quarterly interest expense by approximately $0.9 million.
- Management said cash, expected operating cash flows, and available credit and ATM capacity should fund operations, scheduled debt service and projected dividends for at least the next 12 months.
Cash flows, investment and distributions
Investing activities used $133.3 million, chiefly for property acquisitions; financing activities provided $110.9 million, including $120.0 million of revolver borrowings and $16.2 million of net ATM proceeds. The company acquired five properties in Q1 for $141.5 million, with initial annual cash rent of $10.1 million. It sold one skilled nursing facility for net proceeds of $7.0 million and recorded a $0.2 million loss. A $0.265-per-share dividend was declared, totaling $25.6 million, and paid April 15, 2021.
Outlook, risks and notable items
- No numerical earnings or acquisition guidance was provided. From January 1 through May 6, 2021, the company reported acquisitions of six facilities for approximately $151.2 million, expected to generate initial annual cash revenues of $10.9 million at an initial blended yield of about 7.2%. The April acquisition was funded with cash on hand.
- COVID-19 remained a material uncertainty. Management reported declining seniors-housing occupancy in Q4 2020 and further decline in Q1 2021; skilled-nursing occupancy began stabilizing in Q1. Higher operator costs and lower occupancy could impair tenants’ ability to pay rent. The company had collected approximately 100% of contractual rent due for Q1 and April 2021 and had not granted rent relief to tenants to date.
- Operators reported approximately $166.1 million of federal and state COVID-related relief approved, received and retained to date; two operators had disclosed returning or planning to return some or all relief funds. Management cautioned that reduced support or further operating deterioration could change its rent-relief outlook.
- Tenant concentration is notable: Ensign represented 32% and Priority Management Group 16% of rental income in both Q1 2021 and Q1 2020. COVID effects on operators, tenant credit and lease performance, access to capital, interest rates and LIBOR transition are key risks.
- The company had $14.1 million of committed capital improvements, of which $13.1 million was subject to rent increases when funded; most was expected to be funded over one to two years. Ordinary-course legal claims were not expected to have a material adverse effect, and no material legal proceedings were reported.
Important facts for investors to verify
- Whether occupancy, skilled mix, operator relief funding and tenant rent collections improve or weaken after Q1, and whether rent relief becomes necessary.
- Tenant-level financial performance and concentration exposure, particularly to Ensign and PMG.
- Acquisition funding, realized cash yields and the effect of new properties on leverage, cash flow and per-share results.
- Variable-rate debt exposure, covenant headroom, refinancing needs and the transition away from LIBOR.
- Whether operating cash flow can sustainably support dividends and capital commitments; Q1 operating cash flow declined year over year while acquisition spending rose sharply.