CareTrust REIT(CTRE) - 2019 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements of CareTrust REIT, Inc. for the quarter ended June 30, 2019, including balance sheets, income statements, statements of equity, and cash flows, along with detailed notes explaining significant accounting policies, real estate investments, debt, equity, and other financial disclosures Condensed Consolidated Balance Sheets This section provides a snapshot of the Company's financial position, detailing assets, liabilities, and equity as of June 30, 2019, and December 31, 2018 | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :-------------------------- | :--------------------------- | :------------------------------- | | Total Assets | $1,531,559 | $1,291,762 | | Total Liabilities | $573,422 | $523,515 | | Total Equity | $958,137 | $768,247 | - Real estate investments, net, increased significantly from $1,216,237 thousand at December 31, 2018, to $1,482,040 thousand at June 30, 2019, reflecting substantial acquisitions[13] - Cash and cash equivalents decreased from $36,792 thousand at December 31, 2018, to $2,629 thousand at June 30, 2019[13] Condensed Consolidated Income Statements This section outlines the Company's financial performance, presenting revenues, expenses, and net income for the three and six months ended June 30, 2019, and 2018 | Metric (in thousands) | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :-------------------------- | :----------- | :----------- | :----------- | :----------- | | Total Revenues | $46,201 | $38,969 | $85,859 | $77,070 | | Total Expenses | $26,503 | $25,702 | $50,108 | $51,247 | | Net Income | $19,698 | $13,267 | $35,751 | $27,874 | | Basic EPS | $0.21 | $0.17 | $0.39 | $0.36 | | Diluted EPS | $0.21 | $0.17 | $0.39 | $0.36 | - Rental income increased by 27% for the three months ended June 30, 2019, compared to the same period in 2018, primarily due to new real estate investments and increased rental rates[17] - Tenant reimbursements decreased by 100% for both the three and six months ended June 30, 2019, compared to 2018, due to the adoption of new lease accounting standards (ASU 2016-02) which reclassified certain reimbursements as rental income[17] Condensed Consolidated Statements of Equity This section details changes in the Company's equity, including common shares outstanding, additional paid-in capital, and total equity, for the period ended June 30, 2019 | Equity Component (in thousands) | January 1, 2019 | June 30, 2019 | | :------------------------------ | :-------------- | :------------ | | Common Shares Outstanding | 85,867,044 | 95,073,223 | | Common Stock Amount | $859 | $951 | | Additional Paid-in Capital | $965,578 | $1,161,144 | | Total Equity | $768,247 | $958,137 | - Total equity increased from $768,247 thousand at January 1, 2019, to $958,137 thousand at June 30, 2019, driven by the issuance of common stock and net income[20] - Common dividends declared were $0.225 per share for both the March 31, 2019, and June 30, 2019, quarters[20][94] Condensed Consolidated Statements of Cash Flows This section presents the Company's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2019, and 2018 | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash from operating activities | $61,738 | $42,116 | | Net cash used in investing activities | $(297,199) | $(39,096) | | Net cash from financing activities | $201,298 | $1,631 | | Net (decrease) increase in cash | $(34,163) | $4,651 | | Cash and cash equivalents, end of period | $2,629 | $11,560 | - Net cash provided by operating activities increased by $19.6 million for the six months ended June 30, 2019, primarily due to higher rental income from acquisitions and increased rental rates[179] - Cash used in investing activities significantly increased to $297.2 million in 2019, mainly due to $285.9 million in real estate acquisitions and investments in mortgage loans[28][179] - Net cash provided by financing activities saw a substantial increase to $201.3 million in 2019, driven by $196.0 million in net proceeds from common stock sales and $50.0 million in net borrowings under credit facilities[28][180] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures regarding the significant accounting policies, real estate investments, debt, equity, and other financial information presented in the condensed consolidated financial statements 1. ORGANIZATION This section describes the Company's business, its primary activities, and the composition of its real estate portfolio as of June 30, 2019 - CareTrust REIT, Inc. primarily acquires, finances, develops, and owns real property for lease to third-party healthcare sector tenants[30] - As of June 30, 2019, the Company owned and leased 213 skilled nursing, multi-service campuses, assisted living, and independent living facilities across 28 states, totaling 21,686 operational beds and units[30] - The Company also directly owns and operates three independent living facilities with 264 units in Texas and Utah, and holds other real estate investments including a preferred equity investment and two mortgage loans receivable[30] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the key accounting principles and methods applied in preparing the financial statements, including the adoption of new lease accounting standards and policies for real estate acquisitions and REIT status - The Company adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019, electing practical expedients that allow prospective application and non-reassessment of existing leases[33][37] - Under the new lease ASUs, tenant reimbursements for property taxes and insurance are now classified as rental income if paid directly by the Company to third parties, leading to a reclassification of $0.5 million and $1.3 million for the three and six months ended June 30, 2019, respectively[38][40][42] - The Company's real estate acquisitions are generally classified as asset acquisitions, with acquisition costs capitalized and allocated to tangible and identifiable intangible assets/liabilities based on relative fair values[48][49] - The Company maintains REIT status under the Internal Revenue Code, requiring distribution of at least 90% of its annual REIT taxable income to stockholders to avoid federal income tax[56] 3. REAL ESTATE INVESTMENTS, NET This section provides a breakdown of the Company's real estate investments, including land, buildings, and improvements, and details recent acquisitions and lease arrangements | Investment Category (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------------------------- | :------------ | :---------------- | | Land | $197,510 | $166,948 | | Buildings and improvements | $1,453,944 | $1,201,209 | | Real estate investments, net | $1,482,040 | $1,216,237 | - As of June 30, 2019, 93 of the Company's 216 facilities were leased to subsidiaries of Ensign under master leases, generating $61.0 million in annualized rental revenues, with annual escalations tied to CPI (capped at 2.5%)[59] - For the six months ended June 30, 2019, the Company acquired 19 properties (16 skilled nursing, 3 multi-service campuses) for $291.3 million, expected to generate $26.2 million in initial annual cash rent[64] 4. OTHER REAL ESTATE INVESTMENTS This section details the Company's other real estate-related investments, including preferred equity investments and mortgage loans receivable, and their associated income - In June 2019, the Company purchased a skilled nursing facility in Nampa, Idaho, for approximately $16.2 million, after an initial $2.2 million preferred equity investment, recognizing $0.6 million in interest income for the three months ended June 30, 2019[65][67] - The Company holds another $2.3 million preferred equity investment for a skilled nursing facility in Boise, Idaho, yielding a return of prime plus 9.5% (minimum 12.0%)[66] - Mortgage loans receivable include a $12.5 million loan to Providence Group (9% fixed interest) and an $11.4 million loan to Covenant Care (9% annual interest), with $0.5 million and $1.0 million in interest income recognized for the three and six months ended June 30, 2019, respectively[70][71][72] 5. FAIR VALUE MEASUREMENTS This section provides fair value information for the Company's financial instruments, including preferred equity investments, mortgage loans receivable, and senior unsecured notes payable | Financial Instrument (in thousands) | June 30, 2019 Carrying Amount | June 30, 2019 Fair Value | December 31, 2018 Carrying Amount | December 31, 2018 Fair Value | | :---------------------------------- | :------------------------------ | :----------------------- | :-------------------------------- | :--------------------------- | | Preferred equity investments | $3,079 | $3,415 | $5,746 | $6,246 | | Mortgage loans receivable | $23,646 | $23,701 | $12,299 | $12,375 | | Senior unsecured notes payable | $295,532 | $311,625 | $295,153 | $289,500 | - Fair values for preferred equity investments and mortgage loans receivable are estimated using internal valuation models considering expected future cash flows, collateral value, and market interest rates (Level 3 inputs)[75][76] - The fair value of senior unsecured notes payable is determined using third-party quotes from orderly trades (Level 2 inputs)[76] 6. DEBT This section details the Company's indebtedness, including senior unsecured notes, term loans, and revolving credit facilities, along with their carrying values and key terms | Indebtedness (in thousands) | June 30, 2019 Carrying Value | December 31, 2018 Carrying Value | | :-------------------------------- | :--------------------------- | :------------------------------- | | Senior unsecured notes payable | $295,532 | $295,153 | | Senior unsecured term loan | $198,608 | $99,612 | | Unsecured revolving credit facility | $45,000 | $95,000 | | Total | $539,140 | $489,765 | - The Company's $300.0 million 5.25% Senior Notes due 2025 are fully and unconditionally guaranteed by the Parent Guarantor and certain subsidiaries[80][82] - An Amended Credit Agreement, effective February 8, 2019, provides a $600.0 million unsecured revolving credit facility and a $200.0 million unsecured term loan, with proceeds used for working capital, capital expenditures, and acquisitions[87] - As of June 30, 2019, $200.0 million was outstanding under the Term Loan and $45.0 million under the Revolving Facility, with the Company in compliance with all financial covenants[89][90][192][194] 7. EQUITY This section outlines changes in the Company's equity, including common stock offerings, ATM programs, and dividend declarations - On April 15, 2019, the Company completed a public offering of 6,641,250 common shares, generating approximately $149.0 million in net proceeds, used to repay borrowings on its Revolving Facility[92][149][152] - A new 'at-the-market' (ATM) equity offering program was established on March 4, 2019, allowing the issuance of up to $300.0 million in common stock, with $300.0 million available as of June 30, 2019[92][93] Dividend Declarations | Dividend Period | Dividends Declared per Share | | :-------------- | :--------------------------- | | March 31, 2019 | $0.225 | | June 30, 2019 | $0.225 | 8. STOCK-BASED COMPENSATION This section details the Company's stock-based compensation activities, including grants of restricted stock and performance awards, and the associated expense recognized - In February 2019, the Company granted 91,440 shares of restricted stock to officers and employees and 71,440 performance stock awards to officers, with vesting periods of one to four years[99] - Stock-based compensation expense for the three months ended June 30, 2019, was $1.147 million, up from $0.924 million in the prior year, and for the six months ended June 30, 2019, was $2.141 million, up from $1.828 million[100] - As of June 30, 2019, there was $6.2 million of unamortized stock-based compensation expense with a weighted-average remaining vesting period of 2.3 years[100] 9. EARNINGS PER COMMON SHARE This section presents the basic and diluted earnings per common share for the three and six months ended June 30, 2019, and 2018 | EPS Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--------- | :------ | :------ | :------- | :------- | | Basic EPS | $0.21 | $0.17 | $0.39 | $0.36 | | Diluted EPS | $0.21 | $0.17 | $0.39 | $0.36 | - Weighted-average basic common shares outstanding increased to 94,036 thousand for Q2 2019 from 76,374 thousand for Q2 2018, and to 91,039 thousand for YTD 2019 from 75,941 thousand for YTD 2018[101] 10. COMMITMENTS AND CONTINGENCIES This section addresses the Company's involvement in legal claims and lawsuits, noting that no material adverse effects are anticipated - The Company is party to various claims and lawsuits in the ordinary course of business, but these are not anticipated to have a material adverse effect on its financial condition or results of operations[104] - Tenants are responsible for general or professional liability claims and are obligated to indemnify the Company under lease provisions[104] 11. CONCENTRATION OF RISK This section highlights the Company's concentration of risk related to its largest tenant, Ensign, including the number of facilities leased and its contribution to rental income - As of June 30, 2019, Ensign leased 93 facilities (9,923 operational beds/units) across 10 states, with significant concentrations in California, Texas, Utah, and Arizona[105] - Ensign represented 34% and 37% of the Company's rental income for the three and six months ended June 30, 2019, respectively, a decrease from 42% in the prior year periods[105] 12. SUMMARIZED CONDENSED CONSOLIDATING INFORMATION This section provides condensed consolidating financial information for the Parent Guarantor, Issuers, and Subsidiary Guarantors, illustrating the financial position and performance of the consolidated group - The Notes issued by CTR Partnership, L.P. and CareTrust Capital Corp. are fully and unconditionally guaranteed by CareTrust REIT, Inc. (Parent Guarantor) and its wholly-owned subsidiaries (Subsidiary Guarantors), excluding the Issuers[108] - The section provides condensed consolidating balance sheets, income statements, and cash flow statements for the Parent Guarantor, Issuers, and Subsidiary Guarantors to illustrate the financial position and performance of the consolidated group[112][114][117][120][122][125][127][130][133] 13. SUBSEQUENT EVENTS This section discloses significant events that occurred after the reporting period, including lease terminations, new lease agreements, and potential property sales - On July 15, 2019, the Company terminated its master lease with Trillium Healthcare Group, LLC, covering 18 properties, and entered into a new master lease for 11 properties in Iowa and Georgia[136][145] - The termination is expected to result in a $2.4 million write-off of accounts and straight-line rent receivable in Q3 2019[136][145] - The Company is negotiating to sell three Ohio properties previously operated by Trillium, which could lead to a $7.1 million impairment charge and a reclassification of these properties as held for sale[137][146] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, including an overview of its business, recent transactions, detailed analysis of operating results for the three and six months ended June 30, 2019, liquidity and capital resources, cash flows, indebtedness, and critical accounting policies Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to various risks and uncertainties - The report contains forward-looking statements regarding future financing, business strategies, growth prospects, operating and financial performance, distributions, and compliance with regulations[139] - These statements are subject to risks and uncertainties, including tenant performance, acquisition opportunities, access to capital, interest rate fluctuations, and REIT status maintenance[140] Overview This section provides a general description of CareTrust REIT's business model, its revenue generation strategies, and its approach to portfolio growth and tenant management - CareTrust REIT is a self-administered, publicly-traded REIT focused on owning, acquiring, developing, and leasing seniors housing and healthcare-related properties[142] - The Company generates revenue primarily from triple-net lease arrangements where tenants are responsible for property costs, and aims to grow its portfolio by acquiring properties and diversifying across geographic markets and asset classes[144] - The Company actively monitors tenant performance and may replace operators or provide strategic capital for facility upkeep and modernization[144] Recent Transactions This section summarizes key transactions undertaken by the Company, including lease terminations, property acquisitions, and equity offerings - The Company terminated its master lease with Trillium Healthcare Group, LLC, for 18 properties, subsequently entering a new master lease for 11 properties and negotiating the sale of three Ohio properties[145][146] - From January 1, 2019, through August 6, 2019, the Company acquired 19 properties (16 skilled nursing, 3 multi-service campuses) for approximately $291.3 million, with an expected initial annual cash rent of $26.2 million[148] - A public offering of 6,641,250 common shares on April 15, 2019, generated $149.0 million in net proceeds, used to repay borrowings on the Revolving Facility[149][152] Results of Operations This section analyzes the Company's financial performance, detailing changes in revenues and expenses for the three and six months ended June 30, 2019, compared to the prior year Three Months Ended June 30, 2019 vs. 2018 | Metric (in thousands) | 2019 | 2018 | Increase (Decrease) | Percentage Difference | | :-------------------------- | :------ | :------ | :------------------ | :-------------------- | | Rental income | $44,123 | $34,708 | $9,415 | 27% | | Tenant reimbursements | — | $3,016 | $(3,016) | (100)% | | Interest and other income | $1,191 | $400 | $791 | 198% | | Depreciation and amortization | $13,437 | $11,299 | $2,138 | 19% | | General and administrative | $4,606 | $3,358 | $1,248 | 37% | Six Months Ended June 30, 2019 vs. 2018 | Metric (in thousands) | 2019 | 2018 | Increase (Decrease) | Percentage Difference | | :-------------------------- | :------ | :------ | :------------------ | :-------------------- | | Rental income | $82,470 | $68,524 | $13,946 | 20% | | Tenant reimbursements | — | $5,984 | $(5,984) | (100)% | | Interest and other income | $1,642 | $918 | $724 | 79% | | Depreciation and amortization | $25,339 | $22,876 | $2,463 | 11% | | General and administrative | $7,916 | $6,550 | $1,366 | 21% | - The increase in rental income for both periods is primarily attributed to new real estate investments and higher rental rates for existing tenants, while tenant reimbursements decreased due to accounting standard changes[153][154][163] - Interest and other income significantly increased due to interest from a preferred equity investment repayment and a new mortgage loan receivable[156][165] Liquidity and Capital Resources This section discusses the Company's ability to meet its financial obligations and fund future operations, including its cash position and available financing options - As of June 30, 2019, the Company had $2.6 million in cash and cash equivalents[171] - The Company has $300.0 million available under its new 'at-the-market' (ATM) equity offering program and $45.0 million outstanding under its Revolving Facility[172][173] - Future investments and property developments are expected to be financed by existing cash, borrowings under the Amended Credit Facility, and proceeds from common stock or other securities issuances[174] Cash Flows This section analyzes the Company's cash flow activities, highlighting significant changes in operating, investing, and financing cash flows for the six months ended June 30, 2019, compared to the prior year | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash from operating activities | $61,738 | $42,116 | | Net cash used in investing activities | $(297,199) | $(39,096) | | Net cash from financing activities | $201,298 | $1,631 | - Operating cash flow increased by $19.6 million, primarily due to higher rental income and timing of vendor payments[179] - Investing activities used significantly more cash ($297.3 million) in 2019, mainly for real estate acquisitions and mortgage loan investments[179] - Financing activities provided $201.3 million in 2019, largely from common stock sales and net borrowings under credit facilities[180] Indebtedness This section provides details on the Company's debt structure, including senior notes, term loans, and revolving credit facilities, along with their terms, interest rates, and compliance with covenants - The Company has $300.0 million in 5.25% Senior Notes due 2025, which can be redeemed early under specific conditions, including with proceeds from equity offerings[181][182] - The Amended Credit Agreement provides a $600.0 million Revolving Facility (maturing Feb 2023) and a $200.0 million Term Loan (maturing Feb 2026), with variable interest rates tied to base rate or LIBOR plus a margin[188][189][192] - The Amended Credit Agreement includes financial maintenance covenants such as maximum debt to asset value ratio, minimum fixed charge coverage ratio, and minimum tangible net worth, with which the Company was in compliance as of June 30, 2019[193][194] Obligations and Commitments This section presents a tabular summary of the Company's contractual obligations and commitments, categorized by type and expected payment due dates | Obligation Type | Total (in thousands) | Less than 1 Year (in thousands) | 1-3 Years (in thousands) | 3-5 Years (in thousands) | More than 5 Years (in thousands) | | :-------------------------------- | :------------------- | :------------------------------ | :----------------------- | :----------------------- | :------------------------------- | | Senior unsecured notes payable | $394,500 | $15,750 | $31,500 | $31,500 | $315,750 | | Senior unsecured term loan | $252,484 | $8,009 | $15,845 | $15,867 | $212,763 | | Unsecured revolving credit facility | $54,180 | $2,538 | $5,021 | $46,621 | — | | Operating leases | $3,517 | $141 | $104 | $104 | $3,168 | | Total | $704,681 | $26,438 | $52,470 | $94,092 | $531,681 | Capital Expenditures This section outlines the Company's anticipated capital expenditure policies for its owned and leased properties - The Company anticipates average annual capital expenditures of $400 to $500 per unit for its three independent living facilities[196] - For properties under triple-net leases, capital expenditures are generally the tenant's responsibility, though the Company may finance certain capital expenditures for Ensign-leased facilities (up to 20% of initial investment) and other triple-net master leases, subject to corresponding rent increases[196] Critical Accounting Policies and Estimates This section addresses the significant accounting policies and estimates that require management judgment in the preparation of financial statements - The preparation of financial statements requires management to make estimates and assumptions, which are periodically reevaluated[197][199] - There have been no material changes in critical accounting policies during the six months ended June 30, 2019, as detailed in the Company's Annual Report on Form 10-K for December 31, 2018[199] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the Company's primary market risk exposure, which is interest rate risk related to its variable rate indebtedness, and outlines strategies for managing this risk - The Company's primary market risk exposure is interest rate risk from its variable rate debt, including the $200.0 million Term Loan and $45.0 million Revolving Facility outstanding as of June 30, 2019[200][201] - A 100 basis point increase in interest rates on variable rate debt would have increased interest expense by approximately $1.2 million for the six months ended June 30, 2019[202] - The Company manages interest rate risk by maintaining a mix of fixed and variable rates for its indebtedness and may use interest rate swap agreements in the future, subject to REIT provisions[203] Item 4. Controls and Procedures This section details the Company's disclosure controls and procedures and reports on any changes in internal control over financial reporting - As of June 30, 2019, management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level[205] - There have been no material changes in the Company's internal control over financial reporting during the quarter ended June 30, 2019[206] PART II—OTHER INFORMATION Item 1. Legal Proceedings This section states that the Company is not currently involved in any material legal proceedings - The Company and its subsidiaries are not subject to any material legal proceedings[208] - Claims and lawsuits arising in the ordinary course of business are not individually or in the aggregate anticipated to have a material adverse effect[208] Item 1A. Risk Factors This section refers to the risk factors previously disclosed in the Company's Annual Report on Form 10-K, noting no material changes - There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018[209] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on shares of common stock acquired from employees to satisfy tax withholding obligations upon the vesting of restricted stock awards during the second quarter of 2019 - During the three months ended June 30, 2019, the Company acquired 42,933 shares of common stock from employees at an average price of $23.95 per share[210] - These shares were tendered by employees to cover tax withholding obligations upon the vesting of restricted stock awards[210] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including various agreements, corporate documents, certifications, and XBRL data files - The exhibits include the First Amendment to Amended and Restated Credit and Guaranty Agreement, certifications of the CEO and CFO (Sarbanes-Oxley Act Sections 302 and 906), and XBRL instance and taxonomy documents[215] Signatures This section contains the official signatures of the Company's authorized officers, confirming the filing of the report - The report was signed on August 6, 2019, by Gregory K. Stapley, President and Chief Executive Officer, and William M. Wagner, Chief Financial Officer, Treasurer, and Secretary[218]