CareTrust REIT, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. CareTrust is a healthcare real estate REIT; its portfolio comprised 225 facilities with 23,541 beds and units across 28 states, all leased to independent operators under triple-net leases. The filing was signed November 8, 2021.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $48.6 million | $45.7 million | $142.6 million | $134.2 million |
| Net income | $11.9 million | $21.6 million | $53.7 million | $59.8 million |
| Diluted EPS | $0.12 | $0.23 | $0.56 | $0.63 |
| Interest expense | $5.7 million | $5.5 million | $18.0 million | $18.1 million |
- Rental income grew 7% in Q3 and 9% year to date, primarily from acquired properties and contractual rent increases. Q3 rental income included no recovery of previously reversed rent or lease termination revenue, both of which contributed to the prior-year quarter.
- Q3 net income included a $10.8 million loss on extinguishment of debt, comprising a $7.9 million prepayment penalty and a $2.9 million write-off of financing costs. Without that unusual charge, reported Q3 earnings would have been higher; the filing does not provide an adjusted earnings measure.
- Net cash provided by operating activities was $118.4 million for 9M 2021, versus $108.4 million. Investing activities used $182.0 million, largely for real estate acquisitions; financing activities provided $62.4 million. Cash declined $1.2 million to $17.7 million.
- At September 30, total debt principal was $680.0 million: $400.0 million of 2028 notes, a $200.0 million term loan and $80.0 million drawn on a $600.0 million revolving facility. Revolver availability was $520.0 million. Total liabilities were $726.1 million and equity was $917.6 million.
- The company declared quarterly dividends of $0.265 per share. Dividends paid during the first nine months were $75.1 million.
Material changes and developments
- CareTrust issued $400 million of 3.875% senior notes due 2028 and redeemed its $300 million 5.25% notes due 2025 on July 1, 2021. The refinancing extended note maturity and reduced the stated coupon, but generated the $10.8 million extinguishment loss.
- From January 1 through November 8, 2021, the company acquired eight properties for approximately $183.7 million, with stated initial annual cash revenues of approximately $13.1 million and an initial blended yield of approximately 7.3%.
- ATM sales during 9M generated $23.5 million gross proceeds from 990,000 shares; $476.5 million remained available under the program at quarter-end. No shares were repurchased under the $150 million repurchase authorization.
Outlook, risks and contingencies
- Management said available cash, expected operating cash flow, and access to the credit facility and ATM program should fund operations, scheduled debt service and projected dividends for at least the next 12 months. The filing gives no earnings or revenue guidance.
- COVID-19 continued to pressure tenants through labor shortages, higher operating costs and occupancy effects. Skilled nursing occupancy had improved from its January 2021 low through Q3; seniors housing occupancy had declined from late 2020 and remained flat through Q3. Management cautioned that pandemic effects could be material and uncertain.
- CareTrust deferred $1.8 million of Noble-affiliate rent for July–September, about 4% of Q3 contractual base rent. Deferred rent and Q4 contractual rent are due upon closing a purchase of two Noble-owned assisted living facilities; if the acquisition does not close within the agreed timeframe, unpaid rent becomes immediately due. The company reported 96.1% collection of October contractual rent across the portfolio before applying cash deposits.
- Tenant concentration is notable: Ensign generated 33% of Q3 rental income and PMG 15%. Ensign leased 95 facilities. Tenant ability to meet lease obligations, healthcare labor availability, COVID-19 developments, acquisition execution, refinancing and interest-rate exposure are key risks.
- Variable-rate borrowings expose the company to rate increases; management estimated a 100-basis-point increase would have raised 9M interest expense by approximately $2.1 million. The company had no interest-rate swaps and was evaluating the transition away from LIBOR.
- The company reported compliance with applicable debt covenants, no material legal proceedings, and effective disclosure controls. It had $11.7 million of committed capital improvements, of which $10.4 million is expected to generate rent increases.
Important facts for investors to verify
- Whether Noble closes the facility acquisition and pays deferred and Q4 rent as required, and how the related held-for-sale property is resolved.
- Tenant rent collections, occupancy, labor costs and reliance on government relief funds, particularly for Ensign and PMG concentrations.
- Acquisition performance against the stated initial rent and yield, and whether new investments continue to support rental growth and cash generation.
- Debt refinancing and variable-rate exposure, including LIBOR transition plans, revolver maturity and covenant headroom.
- Dividend coverage by recurring operating cash flow, given the declared dividend and planned investment needs.