CareTrust REIT(CTRE) - 2023 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for CareTrust REIT, Inc. as of September 30, 2023, and for the three and nine-month periods then ended, including Balance Sheets, Statements of Operations, Statements of Equity, Statements of Cash Flows, and accompanying notes detailing accounting policies, real estate investments, debt, equity, and other financial activities Condensed Consolidated Balance Sheets - Total assets increased to $1.77 billion as of September 30, 2023, from $1.62 billion at year-end 2022, primarily driven by a rise in real estate investments. Total liabilities decreased to $656.6 million from $771.4 million, mainly due to the repayment of the unsecured revolving credit facility[9] Condensed Consolidated Balance Sheets (in thousands) | Account | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,767,564 | $1,620,781 | | Real estate investments, net | $1,536,048 | $1,421,410 | | Cash and cash equivalents | $3,485 | $13,178 | | Total Liabilities | $656,580 | $771,408 | | Unsecured revolving credit facility | $— | $125,000 | | Senior unsecured notes payable, net | $395,816 | $395,150 | | Total Equity | $1,110,984 | $849,373 | Condensed Consolidated Statements of Operations - For the nine months ended September 30, 2023, the company reported a net income of $27.4 million, a significant turnaround from a net loss of $21.9 million in the same period of 2022. This improvement was largely due to lower impairment charges on real estate investments, which fell from $73.7 million in 2022 to $31.5 million in 2023[12] Statements of Operations Highlights (in thousands, except per share amounts) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $55,877 | $50,293 | $158,036 | $144,322 | | Impairment of real estate | $8,232 | $12,322 | $31,510 | $73,706 | | Net Income (Loss) | $8,685 | $709 | $27,428 | $(21,886) | | Diluted EPS | $0.08 | $0.01 | $0.27 | $(0.23) | Condensed Consolidated Statements of Cash Flows - For the nine months ended September 30, 2023, net cash from operating activities was stable at $112.1 million. Investing activities used $232.3 million, primarily for real estate acquisitions. Financing activities provided $110.5 million, largely from the issuance of common stock ($319.0 million), which was used to pay down the revolving credit facility ($125.0 million net repayment) and pay dividends ($83.1 million)[22] Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $112,096 | $110,672 | | Net cash used in investing activities | $(232,305) | $(141,759) | | Net cash provided by financing activities | $110,516 | $16,053 | | Net decrease in cash | $(9,693) | $(15,034) | Notes to Condensed Consolidated Financial Statements - As of September 30, 2023, the company's portfolio consisted of 225 properties (SNFs, ALFs, ILFs) with 23,916 beds/units across 28 states. The primary business is leasing these properties to third-party healthcare operators[24] - During the nine months ended September 30, 2023, the company acquired 13 properties for a total purchase price of $198.6 million, expected to generate initial annual cash rent of $17.1 million[41] - The company recognized impairment charges of $31.5 million in the first nine months of 2023, with $23.5 million related to assets held for sale and $8.0 million for a property held for investment[50][53][172] - The company utilizes an "at-the-market" (ATM) equity program. During Q3 2023, it settled forward contracts for 10.9 million shares, raising net proceeds of $213.1 million. As of September 30, 2023, 4.9 million shares remained outstanding under forward contracts[99][100][102] - The company's two largest operators, Ensign and Priority Management Group, accounted for 34% and 15% of total revenue, respectively, for the three months ended September 30, 2023[123] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results of operations, highlighting the business overview, recent developments, and operational performance, including the post-COVID operating environment for tenants, strategic responses, revenue and expense drivers, liquidity, capital resources, and material cash requirements Overview and Recent Developments - The company is a self-administered REIT focusing on skilled nursing and seniors housing properties, primarily through triple-net leases. As of September 30, 2023, it owned 225 facilities[136] - Tenants continue to face post-pandemic challenges, including labor shortages, higher operating costs, and occupancy levels below pre-pandemic norms. The expiration of the Public Health Emergency (PHE) on May 11, 2023, may further impact tenant financials[139][141] - Contractual rent collections were 97.5% for Q3 2023 and 99.3% for October 2023 (excluding cash deposits), indicating strong but slightly pressured performance from operators[146] - From January 1 to November 9, 2023, the company acquired 15 properties for approximately $233.7 million, expected to generate $19.2 million in initial annual cash revenues[154] Results of Operations Comparison of Three Months Ended Sep 30, 2023 vs. Jun 30, 2023 (in thousands) | Account | Q3 2023 | Q2 2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Rental income | $51,218 | $47,745 | $3,473 | 7% | | Interest and other income | $4,659 | $3,808 | $851 | 22% | | Impairment of real estate | $8,232 | $21,392 | $(13,160) | (62)% | | Unrealized losses | $(5,251) | $(2,151) | $(3,100) | 144% | Comparison of Nine Months Ended Sep 30, 2023 vs. Sep 30, 2022 (in thousands) | Account | Nine Months 2023 | Nine Months 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Rental income | $145,126 | $139,831 | $5,295 | 4% | | Interest and other income | $12,910 | $4,491 | $8,419 | 187% | | Interest expense | $32,617 | $20,400 | $12,217 | 60% | | Impairment of real estate | $31,510 | $73,706 | $(42,196) | (57)% | - The 187% increase in interest and other income for the nine-month period was primarily driven by $8.9 million from new loan originations made after January 1, 2022[169] - The 60% increase in interest expense for the nine-month period was driven by higher interest rates on the Term Loan and Revolving Facility, contributing $6.0 million and $3.6 million to the increase, respectively[171] Liquidity and Capital Resources - The company believes its operating cash flow, cash balance of $3.5 million, and available capital will be sufficient to meet its needs for at least the next 12 months[179] - As of September 30, 2023, the company had significant available liquidity, including $600.0 million under its Revolving Facility, $496.0 million under its new ATM Program, and unsettled forward equity contracts for 4.9 million shares[179][103] - Financing activities for the first nine months of 2023 provided $110.5 million, primarily from $319.0 million in net proceeds from common stock issuance, which was used for a net repayment of $125.0 million on the revolving facility and $83.1 million in dividend payments[185] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is interest rate risk associated with its variable-rate indebtedness, specifically the $200.0 million outstanding Term Loan under the Second Amended Credit Agreement, where rising interest rates could increase borrowing costs for financing acquisitions and servicing existing variable-rate debt - The company's primary market risk is interest rate risk on its variable rate debt, which includes a $200.0 million Term Loan and a $600.0 million Revolving Facility (undrawn as of Sep 30, 2023)[196][197] - A hypothetical 100 basis point (1%) increase in interest rates would have increased interest expense by approximately $1.5 million for the nine months ended September 30, 2023[199] - The company may use interest rate swaps to hedge risk in the future but currently has none. It manages risk by maintaining a mix of fixed and variable rate debt[200] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of September 30, 2023, with no material changes to the internal control over financial reporting occurring during the third quarter of 2023 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[202] - There were no changes in internal control over financial reporting during the quarter ended September 30, 2023, that materially affected, or are reasonably likely to materially affect, internal controls[203] PART II—OTHER INFORMATION Legal Proceedings The company and its subsidiaries are not party to any material legal proceedings, and any claims arising in the ordinary course of business against tenants are the responsibility of the tenants, who are obligated to indemnify the company - The company is not currently subject to any material legal proceedings[206] Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K and prior 10-Qs, with the exception of a revised risk factor concerning investments through joint ventures, detailing the specific risks associated with such partnerships - There have been no material changes from previously disclosed risk factors, other than a revision to the risk factor related to joint ventures[207] - Risks associated with joint ventures include potential conflicts of interest with partners, shared control over major decisions, liability for partner actions, and restrictions on transferring the company's interest[208] Other Information There is no information to be reported under this item for the period - None[209] Exhibits This section lists the documents filed as exhibits to the Form 10-Q, including the First Amendment to the Second Amended and Restated Credit and Guarantee Agreement, CEO and CFO certifications, and Inline XBRL data files - A key exhibit filed is the First Amendment to the Second Amended and Restated Credit and Guarantee Agreement, dated October 10, 2023[211] - Certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits[211]