CareTrust REIT, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited. CareTrust is a healthcare real estate investment trust that primarily leases properties to third-party operators. At quarter-end, it owned 221 facilities with 23,135 beds and units across 29 states, and held $158.7 million of real estate-related loans and investments.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $50.3 million | $48.6 million | $144.3 million | $142.6 million |
| Rental income | $47.0 million | $48.1 million | $139.8 million | $141.1 million |
| Net income (loss) | $0.7 million | $11.9 million | ($21.9 million) | $53.7 million |
| Diluted EPS | $0.01 | $0.12 | ($0.23) | $0.56 |
| Interest expense | $8.4 million | $5.7 million | $20.4 million | $18.0 million |
- Q3 revenue increased 3.5% year over year, as higher interest and other income more than offset lower rental income. Nine-month revenue rose 1.2%, while rental income declined 0.9%.
- Nine-month operating cash flow was $110.7 million, down from $118.4 million. Investing cash outflow was $141.8 million; financing cash inflow was $16.1 million. Cash fell by $15.0 million to $4.9 million.
- At September 30, debt had $780.0 million principal and $774.2 million carrying value: $400.0 million of 3.875% notes due 2028, a $200.0 million term loan due 2026, and $180.0 million drawn on the revolving facility. Total liabilities were $831.9 million and equity was $813.7 million.
- Management reported $420.0 million of available revolver capacity and $476.5 million remaining under the ATM equity program. It said cash, expected operating cash flow, borrowing availability, and ATM capacity should cover needs for at least the next 12 months. The revolving facility matures February 8, 2023, with two six-month extension options.
- Quarterly dividends declared were $0.275 per share. Nine-month dividends paid totaled $79.5 million.
Material changes and notable items
- Nine-month results included $73.7 million of real estate impairment charges, including $12.3 million in Q3; $3.8 million of net loan-loss provision; $4.7 million of unrealized losses on real estate-related investments; and $2.1 million of net losses on real estate sales. These items contributed to the nine-month net loss.
- The company classified 19 properties as held for sale at quarter-end, with a carrying value of $77.7 million. It sold six skilled nursing facilities and one multi-service campus in Ohio for $32.8 million net proceeds, recording a $2.1 million loss. It also provided related-party-of-the-purchaser financing of $12.0 million in two loans bearing 8.5% interest.
- Real estate-related investments increased to $158.7 million from $15.2 million at year-end 2021, largely reflecting new secured and mezzanine loans. Their $4.7 million Q3 fair-value loss was attributed to rising interest rates; these investments use Level 3 valuation inputs.
- Rent collection remained below full contractual amounts: 93.4% in Q3 and 94.2% for the first nine months, including cash deposits used to offset shortfalls; excluding deposits, collections were 92.5% and 93.1%, respectively. October collections were 95.6% including deposits and 92.7% excluding them.
Outlook, risks, and management commentary
- No specific earnings or revenue guidance was provided. Management expects liquidity to be sufficient for at least 12 months and intends to continue quarterly dividends, subject to board discretion and REIT distribution requirements.
- Management said tenant operations remained affected by COVID-19, labor shortages, higher agency staffing costs, and occupancy below pre-pandemic levels. It noted that seniors housing occupancy improved modestly through the first three quarters of 2022, while skilled nursing occupancy continued a gradual recovery.
- Inflation and rising interest rates may pressure tenant finances, increase borrowing costs, impair loan valuations, and make property sales more difficult. A 100-basis-point increase in variable rates would have increased nine-month interest expense by approximately $2.9 million, based on debt outstanding at quarter-end. The company reported no interest-rate hedges.
- Key exposures include tenant rent-paying capacity, property sale prices and further impairment risk, loan credit and subordination risk, and revenue concentration. Ensign represented 36% of Q3 rental revenue and Priority Management Group 16%; California and Texas represented 27% and 22%, respectively.
- The company said it was in compliance with debt covenants. It reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether rent collections improve and tenants can meet lease obligations without continued use of cash deposits or further collectibility adjustments.
- Expected sale prices and timing for the 19 held-for-sale properties, and whether further impairment charges will be required.
- Performance, collectibility, and valuation assumptions for the expanding secured and mezzanine loan portfolio, including subordinated tranches and loans on non-accrual status.
- Plans for the February 2023 revolving facility maturity and exposure to variable-rate borrowing costs and benchmark-rate transition.
- Whether operating cash flow and available financing remain adequate alongside dividends, capital commitments of $16.1 million, and future investment plans.