CareTrust REIT, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. CareTrust is a healthcare REIT that owns and leases skilled nursing, senior housing and related properties, and also makes real-estate-secured and mezzanine loans. At quarter-end, it owned or held interests in 228 facilities with 24,189 operational beds and units across 29 states.
Key financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $63.1 million | $50.6 million | Up 24.6% |
| Net income attributable to CareTrust | $28.7 million | $19.2 million | Up 49.5% |
| Diluted EPS | $0.22 | $0.19 | Up $0.03 |
| Net cash from operating activities | $48.8 million | $35.1 million | Up $13.7 million |
- Rental income was $53.5 million, up $7.3 million (16%). Growth reflected acquisitions, rent increases, higher tenant reimbursements and $0.6 million of amortization of a below-market lease intangible.
- Interest and other income rose to $9.6 million from $4.4 million, mainly due to greater money-market income and loan investments.
- Interest expense fell to $8.2 million from $9.8 million, primarily because of lower revolving-facility borrowings. Depreciation and amortization increased to $13.4 million; general and administrative expense increased to $6.8 million from $5.1 million.
- Property impairment charges were $2.7 million, versus $1.9 million, relating to properties held for sale. Unrealized losses on real-estate-related investments were $0.6 million.
- Cash and cash equivalents were $451.2 million at March 31, versus $294.4 million at year-end. Total assets were $2.35 billion and total equity was $1.68 billion.
- Debt principal totaled $600 million: $400 million of 3.875% notes due in 2028 and a $200 million variable-rate term loan due in 2026. No revolving-facility borrowings were outstanding; $600 million of revolving capacity was available. The company reported compliance with debt covenants.
- Quarter-end other real-estate-related investments had a carrying value of $233.3 million. Operating cash flow was more than offset by $123.2 million of investing cash outflows, largely for property acquisitions, loan investments and acquisition escrows.
Material changes and activity
- CareTrust issued 11.6 million shares through its at-the-market program at an average $23.55 per share, generating $273.2 million gross and $269.8 million net proceeds. Shares outstanding increased to 141.7 million at quarter-end from 130.0 million at year-end.
- It acquired four properties for approximately $66.6 million, with initial annual cash rent of approximately $6.0 million. It also originated or extended significant mezzanine loans. The company attributed much of the cash balance increase to equity proceeds.
- Cash dividends declared were $0.29 per share, payable April 15, 2024. Cash dividends paid during the quarter were $36.5 million.
- Thirteen facilities, with a net carrying value of $12.5 million, were classified as held for sale at quarter-end. Two facilities were sold during the quarter for net proceeds of approximately $1.0 million.
Outlook, commentary and risks
- Management said cash, expected operating cash flow and available revolving capacity should cover operating needs, debt service, dividends, capital expenditures and working capital for at least the next 12 months. No specific earnings or revenue guidance was provided.
- The company collected 98.0% of contractual rent and interest due during the quarter, excluding cash deposits. Management noted that some tenants continue to face higher labor and other operating costs, labor shortages, and occupancy challenges in senior housing.
- CMS proposed a 4.1% increase in Medicare Part A SNF payments for fiscal 2025. Separately, a final federal nursing-home staffing rule issued April 22, 2024 sets minimum staffing standards and requires 24/7 registered-nurse coverage. Management is evaluating the impact and cautioned that the rule’s unfunded staffing requirements may materially harm tenant financial condition. California’s phased healthcare minimum-wage increases may also add tenant costs.
- Key risks include tenant or borrower inability to meet obligations, further impairments or difficulty selling held-for-sale properties, interest-rate and capital-market risk, healthcare regulation and reimbursement changes, and geographic and operator concentration. Ensign accounted for 30% of Q1 revenue; Priority Management Group accounted for 13%. California and Texas represented 31% and 20%, respectively.
- Management estimated that a 100-basis-point increase in rates on variable-rate debt would increase quarterly interest expense by approximately $0.5 million. The company had no interest-rate swaps at quarter-end.
- Subsequent to quarter-end, CareTrust reported acquisitions of two California multi-service campuses through a joint venture and one additional campus, and a $26.7 million mortgage loan extended May 1, 2024.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material legal proceedings and no material changes to previously disclosed risk factors other than the healthcare staffing and wage developments described in the filing.
Important facts for investors to verify
- Whether rent and interest collections remain strong and whether tenant operating pressures affect lease coverage or payment performance.
- How the federal staffing rule and California wage increases affect tenants’ costs, operations and ability to pay rent.
- The assumptions and sale progress for the 13 held-for-sale facilities, including exposure to additional impairment charges.
- Returns and credit performance of the expanding loan portfolio, including its Level 3 fair-value estimates and significant unobservable valuation inputs.
- The impact of the large ATM issuance on per-share performance, and the company’s funding needs for acquisitions, dividends and committed capital expenditures.
- Variable-rate debt exposure, refinancing needs and continued covenant compliance.