CareTrust REIT, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. CareTrust is a healthcare-focused REIT that primarily owns and leases skilled nursing, seniors housing and related properties under triple-net leases.
Business context
At year-end, the portfolio comprised 216 facilities with 22,831 operational beds and units in 28 states, plus five real estate-related loans with a carrying value of $156.4 million. Skilled nursing facilities generated 72% of 2022 rental income. California and Texas were the largest state concentrations, at 27% and 22% of rental income, respectively. Ensign-related leases and guarantees represented 35% of annualized contractual rent; Priority Management Group represented 16%.
Key financial metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $196.1 million | $192.4 million |
| Rental income | $187.5 million | $190.2 million |
| Interest and other income | $8.6 million | $2.2 million |
| Net income (loss) | $(7.5) million | $72.0 million |
| Diluted earnings (loss) per share | $(0.08) | $0.74 |
| Cash from operating activities | $144.4 million | $156.9 million |
| Cash from investing activities | $(127.4) million | $(192.6) million |
| Cash from financing activities | $(23.7) million | $36.7 million |
| Cash and cash equivalents at year-end | $13.2 million | $19.9 million |
| Debt principal at year-end | $725.0 million | $680.0 million |
Net loss included $79.1 million of real estate impairment charges, a $3.8 million net loss on property sales and a $7.1 million unrealized loss on real estate-related loans. The company also recorded a $3.8 million net provision for loan losses. Interest expense rose 27% to $30.0 million. The filing does not provide a clear operating-margin measure.
Annual cash dividends declared were $1.10 per share, compared with $1.06 in 2021. Operating cash flow exceeded dividends paid of $106.1 million, although REIT distribution requirements, debt covenants and board discretion affect future distributions.
Material changes versus 2021
- Total revenue increased 2%, as higher interest income from new loans more than offset lower rental income.
- Rental income fell 1% to $187.5 million. The company recorded a $1.4 million collectibility adjustment and moved four operators to cash-basis revenue accounting after concluding collection was not probable.
- Net income of $72.0 million in 2021 shifted to a $7.5 million net loss, primarily reflecting 2022 impairments and loan-related losses. 2021 results included a $10.8 million debt-extinguishment loss.
- Operating cash flow declined $12.5 million. The company invested $149.7 million in real estate-related investments and other loans and raised $47.2 million net through its at-the-market equity program.
- Occupancy improved year over year: SNFs were 73% versus 69%, multi-service campuses 71% versus 66%, and ALFs/ILFs 74% versus 73%. Tenant-reported occupancy figures were not independently verified.
Outlook, risks and unusual items
- Management stated that operating cash flow, cash on hand, $475 million of available revolving capacity and ATM availability were expected to cover needs for at least the next 12 months. The filing provides no specific earnings or acquisition guidance.
- Contractual rent collections were 95.2% for 2022 including cash deposits used to offset shortfalls, and 94.0% excluding deposits. January 2023 collections were 94.5%.
- COVID-related labor shortages, elevated costs and occupancy below pre-pandemic levels continued to pressure tenants. Management noted that the COVID-19 public health emergency was expected to end May 11, 2023; expiration of waivers could affect SNF occupancy or revenue.
- Inflation and higher interest rates increased tenant cost pressures and CareTrust’s borrowing and capital costs. A 100-basis-point increase in rates on variable-rate debt would have added an estimated $3.3 million of 2022 interest expense. No interest-rate swaps were in place at year-end.
- CareTrust recorded impairments while pursuing asset sales and repositioning: it sold 12 facilities during 2022, retained five properties classified as held for sale with a $12.3 million carrying value, and reclassified other properties back to held for use. One additional ALF sale closed in January 2023.
- Debt comprised $400 million of 3.875% senior notes due 2028, a $200 million term loan due 2026 and $125 million drawn on a $600 million revolving facility. The company reported compliance with debt covenants at year-end.
- Key risks include tenant ability to pay rent, substantial operator and geographic concentration, reimbursement and regulatory changes, labor costs, refinancing and interest-rate exposure, and uncertainty in real estate and loan valuations. No material legal proceedings were reported. Deloitte issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether rent collections and tenant coverage improve, particularly for operators on cash-basis accounting or with collection concerns.
- Ensign and PMG concentration, including the financial condition of operators and the scope of guarantees.
- Progress and realized proceeds on held-for-sale assets, and whether further impairments or re-tenanting costs arise.
- Credit performance and valuation assumptions for the $156.4 million loan portfolio, including subordinated tranches and loans on non-accrual status.
- Variable-rate debt costs, covenant headroom, available liquidity and the company’s capacity to maintain dividends while funding commitments and investments.