CareTrust REIT, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; unaudited. CareTrust owns and leases healthcare real estate, primarily under triple-net leases, and operates three independent living facilities. At quarter-end it had 144 leased facilities, three operated facilities, and a preferred equity investment. Unless otherwise indicated, dollar amounts below are in millions.
Financial results and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $25.7 | $17.4 | $49.3 | $34.3 |
| Net income | $7.6 | $2.3 | $13.1 | $4.3 |
| Diluted EPS | $0.13 | $0.07 | $0.25 | $0.13 |
| Net margin | 29.7% | 13.0% | 26.6% | 12.5% |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $28.1 | $15.6 |
- Q2 rental income rose 49% to $22.8 million; six-month rental income rose 45% to $43.7 million. Management attributed the increases mainly to acquisitions made since the comparable prior periods.
- Six-month depreciation and amortization increased 35% to $15.2 million; general and administrative expense rose 41% to $4.4 million. Interest expense declined 2% to $11.6 million.
- Six-month cash used in investing was $144.4 million, primarily for acquisitions, compared with $35.5 million in 2015. Cash provided by financing was $114.5 million. Cash declined $1.8 million to $9.6 million.
- At June 30, total assets were $803.5 million and total equity was $361.9 million. Debt carrying value was $422.1 million: $254.8 million of senior notes, $99.4 million of term-loan debt, and $68.0 million drawn on the revolving facility. Mortgage debt was repaid in February.
- The revolving facility had $400 million of commitments and $68 million outstanding. The filing describes an additional uncommitted incremental facility, but no commitments under it. Borrowing availability remains subject to facility terms and covenants.
Material changes and transactions
- In March, CareTrust issued 9.78 million shares at $11.35 per share, receiving approximately $105.8 million net. Shares outstanding increased from 47.7 million at year-end 2015 to 57.5 million at June 30, 2016.
- In February, the company funded a $100 million unsecured term loan and used approximately $95 million to repay and terminate its secured GECC mortgage loan. It also increased revolving commitments from $300 million to $400 million.
- CareTrust acquired real estate for $144.1 million during the first six months. Management reported 30 properties acquired from January 1 through August 5, for approximately $186.6 million including estimated capitalized transaction costs.
- Quarterly dividends declared were $0.17 per share, compared with $0.16 in Q2 2015; six-month dividends declared were $0.34 versus $0.32.
Outlook, commentary, and risks
- Management said available cash, expected operating cash flows, and credit-facility availability should fund operations, scheduled debt service, and dividends for at least the next 12 months. It gave no specific earnings or revenue guidance.
- The company intends to pursue additional healthcare property acquisitions and may finance them with cash, borrowings, or equity. Its $125 million at-the-market equity program had no sales through June 30.
- Tenant concentration is significant: Ensign leased 94 facilities, and the filing says CareTrust derives a majority of rental income through Ensign leases. Ensign master-lease defaults can cross-default across those leases.
- Variable-rate debt creates interest-rate exposure. A 100-basis-point increase, assuming debt balances stayed constant, would have increased six-month interest expense by approximately $0.8 million. No interest-rate swaps were outstanding.
- Both the senior-note indenture and credit agreement covenants were met at June 30. The filing reports no material legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were judged effective.
- Two August acquisitions were reported as subsequent events: a California skilled nursing facility for approximately $6.9 million and four California properties for approximately $34.3 million, with anticipated initial annual lease revenue of approximately $0.7 million and $3.1 million, respectively.
Important facts for investors to verify
- Ensign’s share of rent and the financial condition and lease coverage of Ensign and other major tenants, particularly Pristine.
- Acquisition returns, lease-up and operating performance, and whether expected rents from recent acquisitions are realized.
- Debt terms, actual variable-rate exposure, covenant headroom, and remaining borrowing capacity under the revolver.
- The effect of share issuance and any future ATM sales on per-share earnings, dividends, and capital needs.
- Whether operating cash flow continues to cover dividends, debt service, and planned investment as the portfolio expands.