CareTrust REIT, Inc. — Q3 2017 Form 10-Q
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2017. CareTrust is a healthcare-property REIT that primarily leases facilities to third-party operators, generally under triple-net leases. At quarter-end, it leased 171 facilities with 16,795 operational beds and units, operated three independent-living facilities, and held $5.4 million of preferred equity investments.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $32.9 million | $27.1 million | $96.4 million | $76.4 million |
| Net income | $11.3 million | $7.8 million | $23.6 million | $21.0 million |
| Diluted EPS | $0.15 | $0.13 | $0.33 | $0.38 |
| Operating cash flow | Not stated for the quarter | Not stated for the quarter | $66.9 million | $49.5 million |
- Q3 revenue grew 22%, principally from properties acquired after July 1, 2016; net income rose 44%. Nine-month revenue rose 26%, while net income increased 13%.
- Nine-month results included an $11.9 million debt-extinguishment loss and $0.9 million real-estate impairment, partly offset by a $3.5 million gain on sale of a preferred equity investment. These unusual items materially affect period comparisons.
- Nine-month interest expense was $17.7 million versus $17.0 million. No FFO/AFFO or operating-margin measure is provided in the supplied filing text.
- At September 30, total assets were $1.126 billion; cash and equivalents were $14.8 million; total liabilities were $520.1 million; and equity was $605.9 million. Real estate investments, net, were $1.089 billion.
- Debt principal totaled $495 million: $300 million of 5.25% notes due 2025, a $100 million term loan, and $95 million drawn on a $400 million revolving facility. The company reported compliance with debt covenants. Cash plus undrawn revolving capacity was approximately $319.8 million; $236.1 million remained available under its ATM program.
- For the nine months, investing activities used $216.9 million, largely for real-estate acquisitions; financing activities provided $157.3 million. Dividends paid were $38.5 million. The declared quarterly dividend was $0.185 per share.
Changes, outlook, and risks
- Growth reflected acquisitions: net real estate investments rose from $893.9 million at year-end 2016 to $1.089 billion at quarter-end. The company issued $300 million of 5.25% notes, using proceeds to redeem its $260 million 5.875% notes due 2021 and repay revolver borrowings. The refinancing extends the notes’ maturity to 2025 but generated the $11.9 million extinguishment loss.
- Common shares outstanding increased to 75.5 million from 64.8 million at year-end 2016. The 2017 ATM program generated $173.8 million gross proceeds through September, with $236.1 million remaining available.
- Management said available cash, expected operating cash flow, and access to the ATM and revolving facility should fund operations, scheduled debt service, and dividends for at least 12 months. It intends to pursue acquisitions when suitable opportunities and financing are available; no earnings or dividend guidance was provided.
- From January 1 through November 7, 2017, the company reported 35 property acquisitions and a mortgage loan totaling approximately $305.1 million, with initial annual cash revenues of about $27.6 million and a stated blended yield of approximately 9.0%. Separately, October acquisitions totaled about $135 million and were expected to generate $12 million of initial annual cash rent; a $12.5 million mortgage loan carried a 9% rate.
- Tenant and operator credit risk is material. Ensign leased 92 facilities and generated $57.7 million in annualized rent. Pristine deferred property-tax/franchise-fee rent and September base rent; quarter-end receivables included about $5.3 million of related pre-funding and $0.8 million of deferred base rent. A November amendment set repayment terms and arranged transfer of seven facilities to new operators, with transfers expected from December 1, 2017 and required within nine months. Successful transfers and collection remain important to monitor.
- Variable-rate debt exposes the company to higher interest costs: management estimated a 100-basis-point rate increase would have raised nine-month interest expense by approximately $0.9 million. Other stated risks include tenant performance, acquisition availability, capital-market access, REIT qualification, and healthcare regulation. The company reported no material change to previously disclosed risk factors and no material legal proceedings.
Important facts for investors to verify
- Pristine’s repayment of deferred amounts, and completion and operational performance of the seven facility transfers to Trillium or other operators.
- Tenant rent coverage and concentration, especially Ensign and Pristine, and whether contractual rent is collected in cash.
- Acquisition yields and integration outcomes, including the October transactions and reported 9.0% blended yield.
- Liquidity and leverage after acquisitions, including ATM issuance, revolver availability, refinancing terms, and sensitivity to interest rates.
- Dividend sustainability relative to recurring cash generation; GAAP EPS is not a substitute for REIT cash-flow measures, which are not provided in this filing excerpt.