CareTrust REIT, Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. This annual filing also provides unaudited fourth-quarter results. CareTrust is a healthcare and seniors-housing REIT that primarily leases properties to operators under triple-net leases.
Business context and portfolio
At year-end, the company reported 154 properties: 151 leased to operators and three independent-living facilities it operated. The portfolio comprised 119 skilled-nursing facilities (including campuses), 31 assisted-living facilities, and four independent-living facilities; leased properties represented 14,919 beds and units. CareTrust also held $13.9 million of preferred-equity investments.
Of the leased properties, 93 were leased to Ensign, 16 to Pristine affiliates, and 42 to 14 other tenants. Ensign accounted for 58% of 2016 revenue excluding tenant reimbursements, underscoring tenant concentration.
Financial results and key metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $104.7 million | $75.0 million |
| Rental income | $93.1 million | $66.0 million |
| Net income | $29.4 million | $10.0 million |
| Diluted earnings per share | $0.52 | $0.26 |
| Net cash from operating activities | $64.4 million | $40.3 million |
| FFO | $61.5 million | $34.1 million |
| FAD | $65.1 million | $37.8 million |
| Cash and cash equivalents at year-end | $7.5 million | $11.5 million |
GAAP net margin was approximately 28.0%, compared with 13.4% in 2015. FFO and FAD are non-GAAP supplemental measures, not substitutes for GAAP earnings or operating cash flow.
Fourth-quarter revenue was $28.2 million and net income was $8.4 million, versus $22.6 million and $5.0 million, respectively, in fourth-quarter 2015. Quarterly diluted EPS was $0.14 versus $0.10.
Total assets were $925.4 million and total equity was $452.4 million at year-end. Debt principal totaled $455.0 million: $260.0 million of 5.875% senior notes due 2021, a $100.0 million unsecured term loan due 2023, and $95.0 million drawn on the revolving facility. The company reported $205.0 million of remaining revolver capacity and compliance with applicable debt covenants. Operating cash flow was more than offset by investing outflows of $284.6 million; financing provided $216.2 million.
Changes versus the prior period
- Revenue rose 40% and net income nearly tripled year over year, primarily reflecting acquisitions and the resulting rental income. Rental income increased $27.1 million, with $26.9 million attributed to investments made after January 1, 2015.
- Operating cash flow increased $24.2 million. Depreciation and amortization increased 32% to $32.0 million as the acquired portfolio expanded.
- Interest expense fell 8% to $23.2 million, primarily reflecting the refinancing of secured debt, partly offset by higher unsecured borrowings and financing-cost amortization.
- The company issued common stock in two public offerings and through its ATM program. Net proceeds from common-stock issuance were approximately $200.4 million in 2016; year-end shares outstanding were 64.8 million, up from 47.7 million.
- In February 2016, CareTrust used proceeds from a new $100.0 million term loan to repay the GE Capital mortgage loan. It acquired properties and made preferred-equity investments, and sold one non-operating facility for $2.9 million, recording a $0.3 million loss.
- Annual dividends declared per share increased to $0.68 from $0.64. The 2016 quarterly rate was $0.17 per share.
Outlook, commentary, risks and unusual items
Management described a strategy of pursuing acquisitions, diversifying tenants and markets, and maintaining balance-sheet flexibility. It stated that cash, expected operating cash flows, and credit-facility availability were expected to fund operations, scheduled debt service, and dividend requirements for at least the next 12 months. The filing provides no quantified earnings or acquisition guidance.
From January 1, 2016 through February 3, 2017, CareTrust acquired 35 properties for approximately $309.5 million, inclusive of estimated transaction costs. In February 2017, it acquired two assisted-living properties for $26.1 million, expected to add $2.2 million in initial annual rent. The company also reported $94.7 million of remaining ATM capacity as of February 3, 2017.
Key risks include dependence on Ensign and Pristine rent payments, healthcare reimbursement and regulatory changes affecting tenants, tenant defaults or bankruptcies, interest-rate exposure, acquisition and refinancing access, and REIT qualification and distribution requirements. A 100-basis-point increase in rates, holding variable-rate debt constant, was estimated to increase 2016 interest expense by $2.0 million; no interest-rate swaps were outstanding at year-end. Management noted uncertainty about changes to federal healthcare policy following the 2016 election.
Legal claims arising in the ordinary course were not expected by the company to be material individually or in aggregate; outcomes of certain Ensign proceedings and Ensign’s ability to meet indemnification obligations remain uncertain. The 2016 financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Tenant credit quality, rent coverage, and the durability of Ensign and Pristine lease payments; also assess the pace of tenant diversification.
- Debt terms, covenant headroom, variable-rate exposure, and refinancing needs, particularly the 2019 revolver maturity and 2021 senior-note maturity.
- Whether acquisition-driven rental growth translates into sustainable per-share earnings and cash available for dividends, accounting for equity issuance and share dilution.
- Tenant exposure to Medicare and Medicaid reimbursement, regulatory compliance, and any effects of healthcare-policy changes.
- REIT qualification and distribution requirements, and the company’s ability to sustain cash dividends while funding acquisitions and debt service.