CareTrust REIT(CTRE) - 2022 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents the unaudited financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the company Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for CareTrust REIT, Inc., including the balance sheets, statements of operations, equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, real estate investments, impairment charges, other investments, fair value measurements, debt, equity, stock-based compensation, earnings per share, commitments, and concentration of risk Condensed Consolidated Balance Sheets This section presents the company's financial position at specific dates | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :--------------------------- | :---------------------------- | :------------------------------- | :-------------------- | | Real estate investments, net | $1,402,889 | $1,589,971 | $(187,082) | | Assets held for sale, net | $141,716 | $4,835 | $136,881 | | Total assets | $1,593,941 | $1,640,848 | $(46,907) | | Total liabilities | $749,358 | $725,091 | $24,267 | | Total equity | $844,583 | $915,757 | $(71,174) | Condensed Consolidated Statements of Operations This section details the company's financial performance over specific periods | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | | :------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | | Total revenues | $46,476 | $45,751 | $725 | | Impairment of real estate investments | $59,683 | $— | $59,683 | | Provision for loan losses, net | $3,844 | $— | $3,844 | | Net (loss) income | $(43,264) | $20,486 | $(63,750) | | Basic (loss) earnings per common share| $(0.45) | $0.21 | $(0.66) | | Diluted (loss) earnings per common share| $(0.45) | $0.21 | $(0.66) | Condensed Consolidated Statements of Equity This section outlines changes in the company's equity during the reporting period | Metric | Balance at January 1, 2022 (in thousands) | Balance at March 31, 2022 (in thousands) | Change (in thousands) | | :--------------------------------------- | :---------------------------------------- | :--------------------------------------- | :-------------------- | | Total Equity | $915,757 | $844,583 | $(71,174) | | Net loss | — | $(43,264) | $(43,264) | | Common dividends ($0.275 per share) | — | $(26,659) | $(26,659) | Condensed Consolidated Statements of Cash Flows This section reports the cash generated and used by operating, investing, and financing activities | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | | :---------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | | Net cash provided by operating activities | $34,579 | $33,949 | $630 | | Net cash used in investing activities | $(24,072) | $(133,300) | $109,228 | | Net cash (used in) provided by financing activities | $(3,816) | $110,901 | $(114,717) | | Net increase in cash and cash equivalents | $6,691 | $11,550 | $(4,859) | | Cash and cash equivalents as of end of period | $26,586 | $30,469 | $(3,883) | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the financial statements 1. ORGANIZATION This note describes the company's business and operational structure - As of March 31, 2022, the Company owned and leased 228 healthcare facilities (SNFs, ALFs, ILFs) with 23,834 operational beds/units in 29 states[26] - The Company's primary business is acquiring, financing, developing, and owning real property leased to third-party tenants in the healthcare sector[26] - The COVID-19 pandemic has had and may continue to have a material adverse impact on the Company's business, results of operations, and financial condition[26] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the key accounting principles and methods used in preparing the financial statements - Financial statements are prepared in accordance with GAAP for interim information and Article 10 of Regulation S-X[27] - Adoption of ASU 2020-04 (Reference Rate Reform) had no material impact on the Company's consolidated financial statements[27] 3. REAL ESTATE INVESTMENTS, NET This note details the company's real estate portfolio, including acquisitions, dispositions, and rental income | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------------------------ | :---------------------------- | :------------------------------- | | Real estate investments, net | $1,402,889 | $1,589,971 | | Real estate investments (gross) | $1,767,272 | $1,979,785 | | Accumulated depreciation and amortization | $(364,383) | $(389,814) | - As of March 31, 2022, 27 facilities were held for sale[29] | Year | Future Contractual Minimum Rental Income (in thousands) | | :--------------- | :------------------------------------------------------ | | 2022 (nine months) | $146,848 | | 2023 | $195,547 | | 2024 | $194,202 | | 2025 | $194,173 | | 2026 | $194,278 | | 2027 | $191,589 | | Thereafter | $998,873 | | Total | $2,115,510 | - The Company has various tenant purchase options for 27 properties, with different option types (fixed base price, fixed base price plus appreciation share, or fixed capitalization rate on lease revenue)[31] | Rental Income Component | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Contractual rent due | $46,978 | $45,171 | | Adjustment for collectibility | $(977) | $— | | Total Rental Income | $46,007 | $45,246 | - During Q1 2022, the Company acquired 1 SNF and 1 multi-service campus for $21.9 million, expected to generate $2.05 million in initial annual cash rent[34] - Lease amendments in Q1 2022 included transferring an ALF from Pennant to Ensign, increasing Ensign's annual cash rent by $0.3 million, and amending Eduro and WLC master leases to include new acquisitions, increasing annual cash rent by $0.8 million and $1.2 million respectively[35][36][37] 4. IMPAIRMENT OF REAL ESTATE INVESTMENTS, ASSETS HELD FOR SALE, NET AND ASSET SALES This note explains charges related to asset value reductions and details properties held for sale or recently sold - An aggregate impairment charge of $59.7 million was recognized for 20 of 27 properties classified as assets held for sale[39] - As of March 31, 2022, the net book value of the 27 properties held for sale was $141.7 million[39] - One ALF with a carrying value of $4.8 million was reclassified out of assets held for sale during Q1 2022[41] - The Company sold one SNF for net proceeds of $1.0 million, recognizing a gain of $0.2 million[42] 5. OTHER REAL ESTATE INVESTMENTS This note provides information on other real estate-related investments, such as loans receivable | Investment Type | Principal Balance (March 31, 2022, in thousands) | Book Value (March 31, 2022, in thousands) | Book Value (Dec 31, 2021, in thousands) | Weighted Average Contractual Interest Rate (March 31, 2022) | Maturity Date | | :----------------------- | :----------------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------------------------- | :------------ | | Mezzanine loan receivable| $15,000 | $15,155 | $15,155 | 12.0% | 11/30/2025 | | Other loans receivable | $5,516 | $5,523 | $3,161 | 8.0% | 9/1/2023 - 12/31/2023 | | Expected credit loss | $(4,594) | $(4,594) | $— | N/A | N/A | | Total | $15,922 | $16,084 | $18,316 | N/A | N/A | - A $4.6 million expected credit loss was recorded for two other loans receivable placed on non-accrual status, net of an $0.8 million recovery[44] | Investment Type | Interest and Other Income (Q1 2022, in thousands) | Interest and Other Income (Q1 2021, in thousands) | | :----------------------- | :------------------------------------------------ | :------------------------------------------------ | | Mezzanine loan receivable| $450 | $450 | | Other | $19 | $55 | | Total | $469 | $505 | 6. FAIR VALUE MEASUREMENTS This note describes the valuation methodologies and hierarchy for assets and liabilities measured at fair value - The mezzanine loan receivable is classified as Level 3 due to significant unobservable inputs in its fair value determination[49] | Asset/Liability | Fair Value Hierarchy Level | Balance as of March 31, 2022 (in thousands) | Balance as of December 31, 2021 (in thousands) | | :--------------------------- | :------------------------- | :------------------------------------------ | :--------------------------------------------- | | Mezzanine loan receivable | Level 3 | $15,155 | $15,155 | | Senior unsecured notes payable | Level 2 | $377,000 | $410,500 | 7. DEBT This note details the company's debt obligations, including senior notes, term loans, and credit facilities | Debt Type | Principal Amount (March 31, 2022, in thousands) | Carrying Value (March 31, 2022, in thousands) | Principal Amount (Dec 31, 2021, in thousands) | Carrying Value (Dec 31, 2021, in thousands) | | :-------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Senior unsecured notes payable | $400,000 | $394,484 | $400,000 | $394,262 | | Senior unsecured term loan | $200,000 | $199,189 | $200,000 | $199,136 | | Unsecured revolving credit facility | $105,000 | $105,000 | $80,000 | $80,000 | | Total | $705,000 | $698,673 | $680,000 | $673,398 | - The 3.875% Senior Notes due 2028 have a principal amount of $400.0 million, with interest payable semi-annually[55] - The Amended Credit Facility includes a $600.0 million Revolving Facility (with $105.0 million outstanding) and a $200.0 million Term Loan (with $200.0 million outstanding)[61][62] - The Company was in compliance with all applicable financial covenants under both the Notes indenture and the Amended Credit Agreement as of March 31, 2022[59][64] 8. EQUITY This note provides information on the company's equity structure, including stock programs and dividends - $476.5 million remained available for future issuances under the ATM Program as of March 31, 2022, with no ATM activity occurring in Q1 2022[67][98] - A $150.0 million share repurchase program, expiring March 31, 2023, had no repurchases through March 31, 2022[67][160] - A cash dividend of $0.275 per share was declared for Q1 2022, payable on April 15, 2022[67] 9. STOCK-BASED COMPENSATION This note details the expenses and activity related to the company's stock-based compensation plans | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Stock-based compensation expense | $1,521 | $1,585 | | RSA and Performance Award Activity | Shares (March 31, 2022) | Weighted Average Share Price (March 31, 2022) | | :--------------------------------- | :---------------------- | :-------------------------------------------- | | Unvested balance at Dec 31, 2021 | 891,333 | $20.91 | | Granted RSAs | 9,684 | $17.56 | | Vested | (329,080) | $20.10 | | Forfeited | (1,900) | $21.50 | | Unvested balance at March 31, 2022 | 570,037 | $21.32 | 10. (LOSS) EARNINGS PER COMMON SHARE This note presents the calculation of basic and diluted earnings per common share | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) income | $(43,264) | $20,486 | | Numerator for basic and diluted earnings | $(43,381) | $20,367 | | Weighted-average basic common shares outstanding | 96,410 | 95,378 | | (Loss) earnings per common share, basic | $(0.45) | $0.21 | | (Loss) earnings per common share, diluted | $(0.45) | $0.21 | 11. COMMITMENTS AND CONTINGENCIES This note discloses the company's contractual obligations and potential liabilities from legal matters - The Company is party to various claims and lawsuits, not anticipated to have a material adverse effect[75] - As of March 31, 2022, the Company committed to fund $5.5 million in capital expenditures for leased facilities, with $4.4 million subject to rent increases[75] 12. CONCENTRATION OF RISK This note identifies significant concentrations of revenue from operators and geographic regions | Operator | Percentage of Total Revenue (March 31, 2022) | Percentage of Total Revenue (March 31, 2021) | | :------------------------ | :------------------------------------------- | :------------------------------------------- | | Ensign | 34% | 32% | | Priority Management Group | 16% | 16% | | State | Percentage of Total Revenue (March 31, 2022) | | :--------- | :------------------------------------------- | | California | 26% | | Texas | 22% | 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 forward-looking statements, an overview of the business, recent developments such as the ongoing impact of COVID-19 and asset impairment, a detailed analysis of operating results, and a discussion of liquidity and capital resources, as well as critical accounting policies Forward-Looking Statements This section highlights statements about future expectations and the inherent risks involved - The report contains forward-looking statements regarding future financing, business strategies, growth, and financial performance[80] - Key risks include the COVID-19 pandemic's impact, tenant ability to meet obligations, potential impairment charges, and access to capital markets[81] Overview This section introduces CareTrust REIT's business model and strategic objectives - CareTrust REIT is a self-administered, publicly-traded REIT specializing in healthcare-related properties, including SNFs, ALFs, and ILFs[82] - Revenues are primarily generated from triple-net lease arrangements where tenants are responsible for property costs[82] - The company plans to grow its portfolio by acquiring additional properties and diversifying across geographic markets and asset classes[84] Recent Developments This section covers significant events and changes impacting the company's operations and financial position COVID-19 and Market Conditions Update This section discusses the ongoing impact of the pandemic on tenant operations, occupancy, and government support - Tenants are experiencing increased operating costs, labor shortages, and reduced occupancy due to the COVID-19 pandemic[85] - Seniors housing occupancy modestly increased in Q1 2022, while SNF occupancy remained stable compared to Q4 2021[86] - The temporary waiver of the three-day hospital stay requirement for Medicare benefits is still in effect through July 2022, but skilled mix is anticipated to decline[86][87] - The temporary suspension of the 2% Medicare sequestration cut ended in March 2022, with a 1% cut effective April 1, 2022, and the full 2% resuming thereafter[87] - In Q1 2022, the Company collected 94.9% of contractual rents (91.8% excluding cash deposits) and moved two operators to a cash basis due to collectibility concerns[90] - CMS proposed a 0.7% decrease in aggregate net payment for SNFs for fiscal year 2023, estimated to reduce Medicare Part A payments by $320 million[92] Impairment of Real Estate Assets, Assets Held for Sale and Asset Sales This section details asset impairment charges, properties classified as held for sale, and recent asset dispositions - A $59.7 million impairment charge was recognized in Q1 2022 for 20 properties designated as held for sale[93] - 27 properties, representing approximately 10% of contractual cash rent, were classified as assets held for sale as of March 31, 2022[93] - One ALF with a carrying value of $4.8 million was reclassified out of assets held for sale[94] - The sale of one SNF generated net proceeds of $1.0 million and a gain of $0.2 million[95] Recent Investments This section outlines recent property acquisitions and their expected financial contributions - Acquired 1 SNF and 1 multi-service campus for approximately $21.9 million between January 1, 2022, and May 5, 2022[96] - These acquisitions are expected to generate initial annual cash revenues of approximately $2.1 million and an initial blended yield of approximately 9.4%[96] At-The-Market Offering of Common Stock This section reports on the company's ATM program activity and remaining availability - No ATM Program activity occurred during the three months ended March 31, 2022[98] - As of March 31, 2022, $476.5 million remained available for future issuances under the ATM Program[98] Results of Operations This section analyzes the company's financial performance by comparing revenues and expenses across periods Three Months Ended March 31, 2022 Compared to Three Months Ended December 31, 2021 This section compares the company's financial performance between the first quarter of 2022 and the fourth quarter of 2021 | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Increase (Decrease) (in thousands) | Percentage Difference | | :------------------------------------ | :---------------------------- | :------------------------------- | :--------------------------------- | :-------------------- | | Rental income | $46,007 | $49,118 | $(3,111) | (6)% | | Interest and other income | $469 | $619 | $(150) | (24)% | | Impairment of real estate investments | $59,683 | $— | $59,683 | * | | Provision for loan losses, net | $3,844 | $— | $3,844 | * | | General and administrative | $5,215 | $10,738 | $(5,523) | (51)% | - Rental income decreased by $3.1 million (6%) primarily due to moving tenants to a cash basis ($2.6 million decrease) and a $1.0 million write-off of uncollectible rent[101] - General and administrative expense decreased by $5.5 million (51%) due to lower stock compensation ($4.1 million) and non-routine transaction costs ($1.4 million)[108] Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 This section compares the company's financial performance between the first quarter of 2022 and the first quarter of 2021 | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Increase (Decrease) (in thousands) | Percentage Difference | | :------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | :--------------------------------- | :-------------------- | | Rental income | $46,007 | $45,246 | $761 | 2% | | Property taxes | $1,420 | $696 | $724 | 104% | | Impairment of real estate investments | $59,683 | $— | $59,683 | * | | Provision for loan losses, net | $3,844 | $— | $3,844 | * | | Gain (loss) on sale of real estate | $186 | $(192) | $378 | (197)% | - Rental income increased by $0.8 million (2%) due to new investments ($2.9 million) and contractual increases ($0.8 million), partially offset by moving tenants to a cash basis ($2.2 million decrease) and uncollectible rent write-off ($1.0 million)[113] - Property taxes increased by $0.7 million (104%) due to assets held for sale, new investments, and transfers to new operators[116] - Gain on sale of real estate improved from a $0.2 million loss in Q1 2021 to a $0.2 million gain in Q1 2022[122] Liquidity and Capital Resources This section discusses the company's ability to meet its financial obligations and fund future operations and investments - The Company is required to distribute at least 90% of REIT taxable income to maintain REIT status[123] - Short-term liquidity requirements include operating/interest expenses, G&A, dividends, operating lease obligations, and capital expenditures[124] - Long-term liquidity needs are for acquisitions, capital expenditures, and debt maturities, to be financed by existing cash, credit facilities, and equity offerings[125] - As of March 31, 2022, the Company had $26.6 million in cash, $495.0 million available under the Revolving Facility, and $476.5 million under the ATM Program[126] Cash Flows This section analyzes the sources and uses of cash from operating, investing, and financing activities | Cash Flow Activity | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | | :---------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | | Net cash provided by operating activities | $34,579 | $33,949 | $630 | | Net cash used in investing activities | $(24,072) | $(133,300) | $109,228 | | Net cash (used in) provided by financing activities | $(3,816) | $110,901 | $(114,717) | - The increase in operating cash flow was primarily due to increased rental payments from new investments, partially offset by moving certain tenants to a cash basis and higher G&A expenses[132] - Investing activities saw a significant decrease in cash used, mainly due to lower real estate acquisitions ($24.0 million in 2022 vs. $138.9 million in 2021)[133] - Financing activities shifted to a net outflow, driven by $26.0 million in dividends paid and a $2.8 million net settlement adjustment on restricted stock, partially offset by $25.0 million in revolving credit borrowings[134] Material Cash Requirements This section outlines the company's significant future cash obligations, including debt, capital expenditures, and dividends - The Company has $400.0 million in 3.875% Senior Unsecured Notes due 2028, with semi-annual interest payments[136] - The Amended Credit Facility includes a $200.0 million Term Loan (maturing Feb 2026) and a $600.0 million Revolving Facility (maturing Feb 2023, with two 6-month extension options), with $105.0 million outstanding[137][138] - As of March 31, 2022, $5.5 million was committed for capital improvements, with $4.4 million subject to rent increases[141] - Quarterly dividend payments are a requirement to maintain REIT status[142] Critical Accounting Policies and Estimates This section describes the accounting policies requiring significant judgment and estimation by management - Financial statements rely on management estimates and assumptions in accordance with GAAP[144] - No material changes to critical accounting policies occurred during the three months ended March 31, 2022[144] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's primary market risk is interest rate risk associated with its variable rate debt under the Amended Credit Facility. A hypothetical 100 basis point increase in interest rates would raise Q1 2022 interest expense by approximately $0.8 million. The impending discontinuation of LIBOR by June 2023 introduces uncertainty regarding future interest rate benchmarks - Primary market risk exposure is interest rate risk related to variable rate indebtedness[145] - As of March 31, 2022, the Company had $200.0 million Term Loan and $105.0 million Revolving Facility outstanding, both with variable interest rates[146] - A 100 basis point increase in interest rates would increase Q1 2022 interest expense by approximately $0.8 million[150] - The discontinuation of LIBOR by June 30, 2023, introduces uncertainty regarding alternative interest rate indices and potential increases in interest expense[148] Item 4. Controls and Procedures This section details the Company's disclosure controls and procedures, which were evaluated by management, including the CEO and CFO, and deemed effective as of March 31, 2022. No material changes in internal control over financial reporting occurred during the quarter Disclosure Controls and Procedures This section confirms the effectiveness of the company's controls for financial reporting and disclosure - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of March 31, 2022[152] Changes in Internal Control over Financial Reporting This section reports on any significant changes to the company's internal controls during the quarter - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022[153] PART II—OTHER INFORMATION This part includes legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings The Company is involved in various routine legal proceedings that are not expected to have a material adverse effect on its operations or financial condition. Tenants are typically responsible for general or professional liability claims and are obligated to indemnify the Company - The Company is a party to various claims and lawsuits arising in the ordinary course of business, none of which are material[156] - Tenants are responsible for general or professional liability claims and indemnify the Company[156] Item 1A. Risk Factors 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, 2021 - No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021[157] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the first quarter of 2022, the Company acquired 138,687 shares of its common stock from employees at an average price of $19.99 per share to cover tax withholding obligations related to restricted stock vesting. The $150.0 million share repurchase program authorized by the Board of Directors remains entirely unused as of March 31, 2022 | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------------- | :------------------------------- | :--------------------------- | | January 1 - January 31, 2022| 30,556 | $20.84 | | February 1 - February 28, 2022| 108,131 | $19.75 | | March 1 - March 31, 2022 | — | — | | Total | 138,687 | $19.99 | - The Company acquired 138,687 shares from employees to satisfy tax withholding obligations related to restricted stock vesting[159][160] - The $150.0 million share repurchase program remains unused as of March 31, 2022[160] Item 6. Exhibits This section lists the exhibits accompanying the Form 10-Q filing, including organizational documents, certifications from the Chief Executive Officer and Chief Financial Officer, and various Inline XBRL documents - The exhibits include Articles of Amendment and Restatement, Amended and Restated Bylaws, CEO and CFO certifications (Sarbanes-Oxley Act Sections 302 and 906), and Inline XBRL documents[162] Signatures The report is officially signed by David M. Sedgwick, President and Chief Executive Officer, and William M. Wagner, Chief Financial Officer and Treasurer, on behalf of CareTrust REIT, Inc. on May 5, 2022 - The report was signed by David M. Sedgwick (President and CEO) and William M. Wagner (CFO and Treasurer) on May 5, 2022[165]