CareTrust REIT, Inc. — Q2 2023 Form 10-Q
Business and period: Healthcare-property REIT reporting for the quarter and six months ended June 30, 2023. It owned 224 facilities with 23,694 operational beds and units across 28 states, and held $166.8 million of real-estate-related loans. Most properties are leased to operators under triple-net leases.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $51.6 million | $47.6 million | $102.2 million | $94.0 million |
| Rental income | $47.7 million | $46.8 million | $93.9 million | $92.8 million |
| Interest expense | $11.0 million | $6.3 million | $20.9 million | $12.0 million |
| Real-estate impairment | $21.4 million | $1.7 million | $23.3 million | $61.4 million |
| Net income (loss) | $(0.5) million | $20.7 million | $18.7 million | $(22.6) million |
| Diluted EPS | $(0.01) | $0.21 | $0.19 | $(0.24) |
Cash flow: First-half operating cash flow was $67.0 million, versus $68.3 million a year earlier. Investing used $176.6 million, principally for acquisitions and investments; financing provided $97.6 million, including $155.0 million of revolver borrowings and $55.2 million of dividends paid. Cash declined by $12.0 million to $1.1 million.
Balance sheet and liquidity: At June 30, total assets were $1.737 billion and equity was $813.0 million. Debt principal totaled $880.0 million ($875.0 million carrying value): $400.0 million of 3.875% notes due 2028, a $200.0 million term loan due 2026, and $280.0 million drawn on a $600.0 million revolver due 2027. The company reported $320.0 million of revolver availability and said available resources were sufficient for at least 12 months. It was in compliance with debt covenants.
Distributions and investments: The company declared quarterly dividends of $0.28 per share. First-half acquisitions totaled $172.5 million for 12 properties, with expected initial annual cash rent of $14.5 million (approximately 8.4% initial blended yield, before rent abatements). Management also reported $41.7 million of mortgage originations through August 3, expected to yield approximately 9.0% initially. The company had $14.2 million of committed property improvements, of which $2.7 million is subject to rent increases when funded.
Material changes and unusual items
- Q2 revenue rose about 8% year over year, mainly reflecting higher interest and other income; rental income increased about 2%. First-half revenue rose about 9%.
- Q2 swung to a small net loss from prior-year profit, principally as real-estate impairment increased to $21.4 million and interest expense rose. First-half earnings improved from a loss to income, largely because impairment charges were substantially lower than in 2022.
- First-half interest expense increased $8.8 million year over year, driven by higher rates and increased revolver borrowings. A 100-basis-point increase in variable rates was estimated to add about $2.4 million to first-half interest expense.
- Fifteen facilities were held for sale at quarter-end, with $23.3 million of first-half impairment charges. The company sold four facilities during the first half for $16.5 million of net proceeds and recorded a $2.0 million gain.
- Lease actions included a $1.7 million annual rent reduction for Premier, replacement of a Noble VA lease with a lower-rent Pennant lease, and a $0.7 million Hillstone rent deferral. The filing also describes rent collection pressure: 96.4% of contractual rent due was collected in the first half, excluding cash deposits; July collections were 98.0%.
- The company executed forward ATM sales for 6.7 million shares at a weighted average $19.71 through June 30; no proceeds had been received because the forwards were unsettled. Through August 3, cumulative forward sales were 10.6 million shares at a $19.80 weighted average price.
Outlook, risks, and contingencies
No specific earnings or operating guidance is provided. Management expects to fund ongoing needs through operating cash flow, available credit, and equity financing, and may pursue acquisitions and loan investments when suitable opportunities and financing are available. It expects tenant conditions to remain affected by labor shortages, higher operating costs, and occupancy below pre-pandemic levels. The COVID-19 public health emergency and related three-day hospital-stay waiver expired May 11, 2023; management notes potential adverse effects on SNF occupancy and revenue. A 4.0% Medicare Part A SNF payment-rate increase for fiscal 2024 was approved and is expected to partially offset tenant cost pressures.
Principal risks include tenants’ capacity to pay rent, loss of temporary government support, healthcare regulation and possible minimum-staffing requirements, inflation and interest-rate increases, refinancing and capital-market access, and additional impairments if asset sales do not achieve expected prices. Ensign generated 36% and Priority Management Group 16% of first-half rental revenue; California and Texas represented 28% and 23%, respectively. The company reported no material legal proceedings. It had $14.2 million of committed property improvement funding and described ordinary-course claims and lawsuits not expected to have a material adverse effect.
Important facts for investors to verify
- Whether held-for-sale facilities are sold near estimated values and whether further impairment charges arise.
- Tenant rent-payment performance, occupancy and labor trends, and the effects of expiring relief programs and healthcare reimbursement or staffing changes.
- Variable-rate debt exposure, future borrowing costs, revolver capacity, and the timing and net proceeds of settling ATM forward sales.
- Whether loan valuations and repayments support reported fair values; the loan portfolio is measured using Level 3 inputs.
- Whether operating cash flow supports dividends, debt service, acquisitions, and committed capital expenditures.