CareTrust REIT, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited. CareTrust is a healthcare-property REIT; at quarter-end it owned 188 leased facilities and operated three independent-living facilities.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $39.0 million | $32.8 million | $77.1 million | $63.4 million |
| Net income | $13.3 million | $2.0 million | $27.9 million | $12.3 million |
| Diluted EPS | $0.17 | $0.03 | $0.36 | $0.17 |
| Operating cash flow | Not separately stated | Not separately stated | $42.1 million | $44.9 million |
- Q2 rental income rose 22% to $34.7 million; six-month rental income rose 23% to $68.5 million. Management attributed growth mainly to properties acquired since the comparable periods and rent increases.
- Net income comparisons were affected by unusual prior-year items: 2017 included an $11.9 million debt-extinguishment loss and $0.9 million impairment, partly offset by a $3.5 million gain on disposition of another real estate investment. First-half 2018 included a $2.1 million gain on a property sale. The filing does not provide a comparable adjusted earnings measure.
- Six-month operating cash flow declined $2.8 million year over year despite higher net income. Investing cash use was $39.1 million, including $47.3 million of property acquisitions and $13.0 million of sale proceeds. Financing cash provided was $1.6 million; ending cash was $11.6 million.
- At June 30, total debt principal was $550 million: $300 million of 5.25% notes due 2025, a $100 million term loan due 2023, and $150 million drawn on a $400 million revolving facility. Cash was $11.6 million. The revolver matures August 2019, with two six-month extension options. The company reported compliance with applicable debt covenants.
- Total assets were $1.212 billion and total equity $638.7 million at quarter-end. Quarterly dividends declared were $0.205 per share; first-half dividends were $0.41 per share.
Material developments, outlook and risks
- In May, Trio and Hillstone took over the nine former Pristine facilities under new 15-year and 12-year master leases, respectively, with approximately $10.0 million of aggregate annual base rent. Two OnPointe facilities were also transferred to existing tenants, with aggregate base rent approximately equivalent to the prior leases.
- CareTrust acquired six skilled-nursing facilities for approximately $47.4 million during the first half. From January through July 2018, it acquired seven for approximately $57.1 million, expected to generate about $5.1 million in initial annual cash revenue at an approximately 9.0% blended yield.
- Second-quarter ATM share sales raised $48.2 million gross. In July, the company sold another 1.9 million shares for $32.0 million gross and used proceeds in part for a $9.7 million acquisition and a $20.0 million revolver repayment. Revolver borrowings were $130.0 million at July 31.
- Management stated that cash, expected operating cash flows, and access to the ATM program and credit facility should fund operations, scheduled debt service and planned dividends for at least 12 months. No numerical earnings or investment guidance was provided. Acquisitions remain dependent on suitable opportunities and financing availability.
- Key risks include tenant performance and lease renewals, concentration in Ensign (43% of annualized revenue excluding reimbursements), access to capital, and variable-rate debt exposure. A 100-basis-point rate increase would have raised first-half interest expense by approximately $1.2 million, assuming unchanged variable debt. The company had no interest-rate swaps.
- The company reported a $10.4 million reserve related to receivables from properties previously leased to Pristine. It also reported that returns on preferred equity investments were not received in cash during the first half. These investments and tenant receivables warrant attention. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether Ensign and other tenants can sustain rent payments, given Ensign’s 43% annualized revenue concentration and the cross-default provisions in its master leases.
- Recoverability of the $10.4 million Pristine-related receivable reserve and collection of accrued preferred-equity returns.
- Cash-flow coverage of dividends and debt service, particularly as operating cash flow declined year over year and the revolver approaches its 2019 maturity.
- Effect of further ATM share issuance on per-share results and dividend coverage, and whether acquisition yields exceed incremental financing costs.
- Future effects of interest-rate movements and the company’s ability to refinance or extend the revolving facility on acceptable terms.