CareTrust REIT, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. CareTrust is a healthcare-property REIT that primarily leases facilities to independent operators under triple-net leases. At quarter-end, it owned 214 leased facilities with 21,779 beds and units, plus one company-operated independent living facility.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $45.7 million | $33.3 million | $134.2 million | $119.2 million |
| Net income (loss) | $21.6 million | $(10.1) million | $59.8 million | $25.7 million |
| Diluted EPS | $0.23 | $(0.11) | $0.63 | $0.28 |
| Net cash from operating activities | Not stated for the quarter | $108.4 million | $95.2 million |
- Q3 rental income rose 43% to $45.0 million; nine-month rental income rose 14% to $130.0 million. However, Q3 contractual rent due was $42.9 million versus $43.1 million a year earlier. Reported growth reflected, among other things, the absence of a $12.1 million collectibility-related rent reversal in 2019, new investments, $1.1 million of lease termination revenue, and $1.0 million of recovered rent.
- Q3 net income benefited from no repeat of the prior-year $16.7 million real estate impairment and $1.1 million loan-loss provision. Nine-month results likewise exclude those 2019 charges. Thus, earnings comparisons include significant unusual-item effects.
- Interest expense fell 22% in Q3 and 15% for the nine months, which management attributed to lower average rates and debt balances. General and administrative expense increased 17% in Q3 and 13% year to date.
- For the nine months, investing activities provided $22.1 million, compared with $326.0 million used in 2019; financing activities used $131.7 million, compared with $199.8 million provided in 2019. Cash decreased $1.2 million to $19.1 million.
Balance sheet, debt and liquidity
- Total assets were $1.454 billion and total equity was $916.0 million at September 30, 2020. Cash and cash equivalents were $19.1 million.
- Debt carrying value was $495.4 million: $296.5 million of 5.25% senior notes due 2025 and $198.9 million under a $200 million term loan due 2026. The $600 million revolving facility had no borrowings outstanding; it matures in 2023 and includes two six-month extension options. Debt carrying value was $554.6 million at December 31, 2019, including $60 million drawn on the revolver.
- Management said cash, expected operating cash flow, and access to the credit facility and equity program should cover operations, scheduled debt service and projected dividends for at least 12 months. The company reported compliance with applicable debt covenants.
- The company paid $0.25 per share in dividends each quarter during the first nine months. Its $500 million at-the-market equity program had no 2020 activity through September 30. A $150 million share-repurchase authorization also had no repurchases through quarter-end.
Changes, outlook and risks
- COVID-19 remained the central operating risk. Management reported declining skilled-nursing occupancy during Q3, elevated tenant costs for staffing, protective equipment and testing, and possible continuing pressure on tenants’ ability to pay rent. Senior-housing occupancy was described as relatively stable. Approximately 98.7% of October contractual rent due had been collected as of the report’s discussion, before applying any cash deposits against shortfalls.
- Management reported estimated federal and state COVID-19 relief of $115 million approved, received and retained by operators, based on operator reports; two operators had returned or planned to return Provider Relief Funds. Future relief, occupancy, tenant performance and rent collection remain uncertain.
- From January 1 through November 5, 2020, CareTrust acquired three skilled-nursing facilities and one assisted-living facility for about $42.2 million, expected to generate about $3.8 million in initial annual cash rent at an initial blended yield of about 9.0%. It sold six skilled-nursing facilities in February and received full repayment of its last mortgage loan in Q3. On November 1, it sold its remaining company-operated independent-living facility for $4.5 million, with no material gain or loss expected.
- CareTrust had $14.1 million committed for expansions, construction and improvements, of which $12.9 million is subject to rent increases when funded. Ensign accounted for 30% of Q3 rental income and Priority Management Group for 16%, reflecting operator concentration.
- No specific financial guidance was provided. Management noted risks from the pandemic, tenant credit and rent collection, occupancy and operating costs, access to capital, interest rates and LIBOR’s planned discontinuation, REIT qualification, and refinancing. A 100-basis-point increase in variable rates was estimated to increase nine-month interest expense by about $1.5 million. The company had no interest-rate swaps.
- Ordinary-course claims and lawsuits were disclosed, but no material legal proceedings were reported. Management stated that disclosure controls were effective and that no material change in internal control occurred during the quarter.
Most important facts for investors to verify
- Whether skilled-nursing occupancy, tenant operating costs, government support and rent collections improve or worsen, and whether any rent relief or lease changes become necessary.
- How much reported rental and earnings growth reflects recurring rent versus the prior-year collectibility reversal, rent recovery, lease termination revenue, acquisitions and absence of prior-year impairment charges.
- Tenant concentration and credit exposure, particularly Ensign and Priority Management Group, and operators’ capacity to meet lease obligations.
- Debt covenant headroom, future borrowing costs and refinancing access, including exposure to LIBOR transition and variable-rate debt.
- Dividend sustainability relative to operating cash flow, required REIT distributions, capital commitments and potential future equity issuance.