CareTrust REIT, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. CareTrust is a healthcare-property REIT. At quarter-end it owned 188 leased facilities with 18,528 operational beds and units, operated three independent-living facilities with 264 units, and held two preferred-equity investments and a mortgage loan. It reported one operating segment.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $38.1 million | $30.6 million; up 25% |
| Rental income | $33.8 million | $27.3 million; up 24% |
| Net income | $14.6 million | $10.3 million; up 42% |
| Basic and diluted EPS | $0.19 | $0.15 |
| Operating cash flow | $22.1 million | $20.2 million |
| Investing cash flow | $(35.1) million | $(55.5) million |
| Cash and cash equivalents | $14.2 million at March 31 | $6.9 million at December 31, 2017 |
| Dividends declared per common share | $0.205 | $0.185 |
Revenue growth primarily reflected $6.6 million of rent from investments made after April 1, 2017, partly offset by $1.1 million in cash rents as of March 31, 2018. The quarter included a $2.1 million gain on the sale of three assisted-living properties. The filing does not provide FFO or AFFO figures.
Total debt principal was $600.0 million: $300.0 million of 5.25% senior notes due 2025, a $100.0 million term loan due 2023, and $200.0 million drawn on the revolving facility. Debt carrying value was $594.1 million. The revolver has $400.0 million in commitments and matures in August 2019, subject to two six-month extension options. Management reported compliance with debt covenants. Interest expense rose 21% to $7.1 million, primarily due to higher revolver borrowings and LIBOR rates. A 100-basis-point increase in variable rates was estimated to add approximately $0.8 million of quarterly interest expense.
Material changes and notable items
- CareTrust acquired six skilled-nursing facilities for approximately $47.4 million, with expected initial annual cash rent of approximately $4.3 million and an initial blended yield of approximately 9.0%.
- It sold three Idaho assisted-living facilities for $13.0 million, generating a $2.1 million gain.
- Pristine-related receivables remain a collection concern. The filing identifies reserves of $0.8 million for unpaid cash rents and $9.6 million for other tenant receivables related to formerly leased Pristine properties. Transfers of nine retained facilities to Trio and Hillstone occurred May 1, 2018, under new leases with approximately $10.0 million of aggregate annual base rent.
- Two OnPointe leases were terminated in March; operating transfers to existing CareTrust tenants were completed May 1. The amended leases’ aggregate base rent increase was approximately equivalent to rent previously received from OnPointe.
- General and administrative expense increased 34% to $3.2 million, reflecting higher stock compensation, cash wages and professional fees.
Liquidity, outlook and risks
Management said available cash, expected operating cash flows, and access to the ATM equity program and credit facility should fund operations, scheduled debt service and planned dividends for at least the next 12 months. Approximately $236.1 million remained available under the ATM program; no shares were sold through it in Q1. The company intends to pursue acquisitions and development when suitable opportunities and financing are available, but gave no quantified earnings or acquisition guidance.
Key risks include tenant performance and rent collection, the ability to refinance or access capital on acceptable terms, variable interest rates, acquisition availability, REIT qualification, and healthcare regulation. Ensign leased 92 facilities and represented 42% of annualized run-rate revenue excluding tenant reimbursements, creating significant operator concentration. The filing reported no material change to previously disclosed risk factors and no material legal proceedings. Management said disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Ensign’s operating and financial condition, given its 42% revenue concentration and cross-default provisions under its master leases.
- Collection and recovery prospects for Pristine-related receivables and the operational and rent performance of the Trio and Hillstone leases.
- Whether the new acquisitions achieve expected rent and yield, and whether transferred OnPointe facilities maintain rent under replacement operators.
- Revolver availability, refinancing plans before its 2019 maturity, and sensitivity to further interest-rate increases.
- Dividend sustainability using REIT cash-flow measures such as FFO or AFFO, which are not provided in this filing.