CareTrust REIT, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The filing was dated February 8, 2024. CareTrust is a healthcare-property REIT that primarily leases skilled nursing and seniors housing facilities to third-party operators under triple-net leases.
Business context and portfolio
- At year-end, the company owned or held through joint ventures 226 facilities, including properties classified as held for sale, with 23,928 operational beds and units across 28 states. California and Texas were the largest state concentrations by rental income.
- Rental income was concentrated among major operators: Ensign accounted for 32% of 2023 revenue and PMG for 14%. Ensign-related properties represented 33% of annualized contractual rental income, including leases it guarantees.
- Occupancy reported for leased properties improved year over year: SNFs 75% versus 73%; multi-service campuses 75% versus 71%; ALFs and ILFs 75% versus 74%. These figures are based on tenant-provided information and are not independently verified.
Financial performance and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| Total revenue | $217.8 million | $196.1 million |
| Rental income | $198.6 million | $187.5 million |
| Interest and other income | $19.2 million | $8.6 million |
| Net income (loss) attributable to CareTrust | $53.7 million | $(7.5) million |
| Diluted EPS | $0.50 | $(0.08) |
| Net cash from operating activities | $154.8 million | $144.4 million |
- Revenue rose 11%; rental income increased 6%, primarily reflecting investments and rent increases, partly offset by lower recognized income from certain tenants accounted for on a cash basis. Interest and other income more than doubled, mainly due to loan originations.
- Net income improved from a loss, but included $36.3 million of real estate impairment charges and a $6.5 million unrealized loss on other real estate investments. Impairments were down from $79.1 million in 2022. The company recorded a $2.2 million net gain on property sales, compared with a $3.8 million loss in 2022.
- Interest expense rose 36% to $40.9 million, largely reflecting higher rates on the term loan and revolving facility. A 100-basis-point increase in variable rates would have raised 2023 interest expense by approximately $2.0 million, based on year-end variable-rate debt.
- Year-end cash was $294.4 million; the $600 million revolving facility had no borrowings outstanding, and $274.1 million remained available under the ATM equity program. Management said these resources and expected operating cash flow should meet needs for at least 12 months. The company reported compliance with debt covenants.
- Debt principal totaled $600 million: $400 million of 3.875% senior notes due 2028 and a $200 million variable-rate term loan due 2026. Total debt was $725 million at year-end 2022, including $125 million drawn on the revolver.
- 2023 cash dividends paid were $115.5 million; the company declared $1.12 per share for the year, up from $1.10 in 2022. Quarterly dividends remain subject to board discretion, available cash and debt restrictions.
Material changes, outlook and risks
- The company issued approximately 30.9 million shares through its ATM program at an average gross price of $20.86, generating $643.8 million gross proceeds before commissions and other adjustments. This materially expanded equity and funded investment capacity.
- During 2023, CareTrust acquired 15 properties for approximately $233.8 million, and originated $53.8 million of mortgage and mezzanine investments. From January 2023 through February 8, 2024, reported acquisitions totaled $244.8 million and other real estate-related investments totaled $105.5 million.
- Five facilities were sold in 2023 for net proceeds of $18.3 million and a $2.2 million net gain. Fourteen facilities remained classified as held for sale at year-end, with $26.8 million of impairment charges related to held-for-sale properties during the year.
- Management described improving SNF occupancy, with seniors housing occupancy recovering but not yet fully back to pre-pandemic levels. Annual rent collections were 97.7% of contractual rent due, excluding cash deposits; fourth-quarter collections were 100.0%.
- No formal earnings or dividend guidance was provided in the supplied filing text. Management highlighted inflation, higher interest rates, labor shortages and operating-cost pressures affecting tenants, as well as potential limits on property sales and higher financing costs.
- Regulatory risks include proposed federal minimum staffing requirements for nursing homes, whose final scope, timing and funding were uncertain, and California SB 525 wage increases scheduled to begin in June 2024. CMS’s fiscal 2024 SNF Medicare rate update provided a net 4.0% increase, which management said may partly offset higher costs.
- Key risks include dependence on tenant rent payments, concentration in Ensign and PMG, reimbursement and staffing changes, tenant insolvency or lease transitions, property impairments, interest-rate exposure, and climate or other uninsured property losses. Management reported no material legal proceedings. The independent auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Tenant credit and rent coverage, particularly Ensign’s ability to support its leases and guarantee obligations, and the financial condition of PMG and other operators.
- Whether held-for-sale assets can be sold near estimated values, given $26.8 million of related 2023 impairments and the use of Level 3 valuation assumptions.
- The effect of variable rates on debt costs, upcoming $200 million term-loan maturity in 2026, refinancing access and covenant headroom.
- Whether tenant occupancy and collections continue to improve, and how staffing mandates, wage increases and reimbursement changes affect tenant rent-paying capacity.
- The per-share impact of substantial ATM issuance and whether future acquisitions generate returns sufficient to support dividends and growth.