What changed in this filing

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Item 1. Financial Statements

2020-08-06 compared with 2020-05-07 · 154 added, 113 removed, 369 unchanged (42% of the section changed)

3 unchanged sentences

(in thousands, except share and per share amounts)

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Real estate investments, net $ 1,420,112 $ 1,414,200

15 unchanged sentences

Preferred stock, $ 0.01 par value;

100,000,000 shares authorized, no shares issued and outstanding as of March 31, 2020 and December 31, 2019

100,000,000 shares authorized, no shares issued and outstanding as of June 30, 2020 and December 31, 2019

Common stock, $ 0.01 par value;

500,000,000 shares authorized, 95,196,331 and 95,103,270 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

500,000,000 shares authorized, 95,214,080 and 95,103,270 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

Additional paid-in capital 1,162,446 1,162,990

6 unchanged sentences

(in thousands, except per share amounts)

For the Three Months Ended March 31,

For the Three Months Ended June 30, For the Six Months Ended June 30,

2020 2019 2020 2019

Rental income $ 42,507 $ 44,123 $ 84,971 $ 82,470

32 unchanged sentences

Balance at March 31, 2020 95,196,331 $ 952 $ 1,161,797 $ ( 240,956 ) $ 921,793

Issuance of common stock, net — — ( 314 ) — ( 314 )

Vesting of restricted common stock, net of shares withheld for employee taxes 17,749 — — — —

Amortization of stock-based compensation — — 963 — 963

Common dividends ($ 0.25 per share)

— — — ( 23,931 ) ( 23,931 )

Net income — — — 18,935 18,935

Balance at June 30, 2020 95,214,080 $ 952 $ 1,162,446 $ ( 245,952 ) $ 917,446

See accompanying notes to condensed consolidated financial statements.

14 unchanged sentences

Balance at March 31, 2019 88,398,273 $ 884 $ 1,012,295 $ ( 202,148 ) $ 811,031

Issuance of common stock, net 6,641,250 67 148,731 — 148,798

Vesting of restricted common stock, net of shares withheld for employee taxes 33,700 — ( 1,029 ) — ( 1,029 )

Amortization of stock-based compensation — — 1,147 — 1,147

Common dividends ($ 0.225 per share)

— — — ( 21,508 ) ( 21,508 )

Net income — — — 19,698 19,698

Balance at June 30, 2019 95,073,223 $ 951 $ 1,161,144 $ ( 203,958 ) $ 958,137

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(in thousands)

For the Three Months Ended March 31,

For the Six Months Ended June 30,

Cash flows from operating activities:

20 unchanged sentences

Repayment of other real estate investment 2,327 2,204

Escrow deposits for potential acquisitions of real estate ( 1,000 ) ( 375 )

Net proceeds from sales of real estate 2,134 131

Net cash used in investing activities ( 24,300 ) ( 66,177 )

Net cash provided by (used in) investing activities 25,325 ( 297,199 )

Cash flows from financing activities:

8 unchanged sentences

Net cash (used in) provided by financing activities ( 107,796 ) 201,298

Net increase in cash and cash equivalents 3,610 177,562

Net decrease in cash and cash equivalents ( 14,529 ) ( 34,163 )

Cash and cash equivalents, beginning of period 20,327 36,792

4 unchanged sentences

Increase in dividends payable $ 2,456 $ 3,834

Increased in deferred financing costs payable $ — $ 144

Right-of-use asset obtained in exchange for new operating lease obligation $ 599 $ 1,010

Transfer of pre-acquisition costs to acquired assets $ 167 $ 242

Increase in pre-acquisition costs payable $ — $ 86

Sale of real estate settled with note receivable $ 32,400 $ —

3 unchanged sentences

Description of Business— CareTrust REIT, Inc.’s (“CareTrust REIT” or the “Company”) primary business consists of acquiring, financing, developing and owning real property to be leased to third-party tenants in the healthcare sector.

As of March 31, 2020, the Company owned and leased to independent operators, including The Ensign Group, Inc.

(“Ensign”), 212 skilled nursing, multi-service campuses, assisted living and independent living facilities consisting of 21,652 operational beds and units located in 28 states with the highest concentration of properties located in California, Texas, Louisiana, Arizona and Idaho.

As of March 31, 2020, the Company also owned and operated one independent living facility which had a total of 168 units located in Texas and also had other real estate investments consisting of three mortgage loans receivable of $ 61.8 million .

As of June 30, 2020, the Company owned and leased to independent operators, including The Ensign Group, Inc.

(“Ensign”), 212 skilled nursing, multi-service campuses, assisted living and independent living facilities consisting of 21,659 operational beds and units located in 28 states with the highest concentration of properties by rental revenues located in California, Texas, Louisiana, Idaho and Arizona.

As of June 30, 2020, the Company also owned and operated one independent living facility which had a total of 168 units located in Texas and also had one other real estate investment consisting of a mortgage loan receivable of $ 13.9 million .

In December 2019, COVID-19 was first reported in Wuhan, China, and on March 11, 2020, the World Health Organization declared COVID-19 a pandemic.

In recent months, the COVID-19 outbreak has spread globally and has led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to reduce its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business limitations and closures (subject to exceptions for essential operations and businesses), quarantines and shelter-in-place orders.

These measures may remain in place for a significant amount of time.

The extent of the COVID-19 pandemic’s effect on the Company’s operational and financial performance, and the operational and financial performance of the Company’s tenants, will depend on future developments, which are highly uncertain and cannot be predicted at this time, including new information which may emerge concerning the severity of COVID-19, actions taken to contain COVID-19, any possible resurgence of COVID-19 that may occur after the initial outbreak subsides, and how quickly and to what extent normal economic and operating conditions can resume.

Although some of these governmental restrictions have since been lifted or scaled back, a recent surge of COVID-19 has resulted in the reimposition of certain restrictions and may lead to other restrictions being reimplemented in response to efforts to reduce the spread of COVID-19.

Given the dynamic nature of these circumstances and the related adverse impact these restrictions have had, and may continue to have, on the economy generally, the Company’s business, results of operations and financial condition may be adversely impacted by the COVID-19 pandemic.

The duration and extent of the COVID-19 pandemic’s effect on the Company’s operational and financial performance, and the operational and financial performance of the Company’s tenants, will depend on future developments, which are highly uncertain and cannot be predicted at this time, including new information which may emerge concerning the severity of COVID-19, actions taken to contain COVID-19, any future resurgence of COVID-19 that may occur after the initial outbreak subsides, and how quickly and to what extent normal economic and operating conditions can resume.

The adverse impact of the COVID-19 pandemic on the Company’s business, results of operations and financial condition could be material.

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Otherwise, tenant recoveries for taxes and insurance are classified as additional rental income recognized by the lessor on a gross basis in its income statements.

T he Company recognized, on a gross basis, property taxes of $ 0.8 million for each of the three months ended March 31, 2020 and 2019.

T he Company recognized, on a gross basis, property taxes of $ 0.8 million and $ 1.6 million for the three and six months ended June 30, 2020, respectively.

The Company recognized, on a gross basis, property taxes of $ 0.5 million and $ 1.3 million for the three and six months ended June 30, 2019, respectively.

The Company’s assessment of collectibility of its tenant receivables includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection.

1 unchanged sentence

For such leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term.

For such leases that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectibility determination.

For the three months ended March 31, 2020 and 2019 , the Company did not recognize any write-off or recovery adjustments to rental income.

For such leases that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.

from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectibility determination.

For the three and six months ended June 30, 2020 and 2019 , the Company did not recognize any write-off or recovery adjustments to rental income.

Estimates and Assumptions —The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.

Management believes that the assumptions and estimates used in preparation of the underlying consolidated financial statements are reasonable.

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While the Company believes its assumptions are reasonable, changes in these assumptions may have a material impact on financial results.

Other Real Estate Investments —Included in “Other real estate investments, net,” on the Company’s condensed consolidated balance sheet are three mortgage loans receivable.

Other Real Estate Investments — Included in “Other real estate investments, net,” on the Company’s condensed consolidated balance sheet are mortgage loans receivable .

Prior to the adoption of Accounting Standards Update (“ASU”) No.

2016-13, Financial Instruments - Credit Losses (Subtopic 326) (“ASU 2016-13”), the mortgage loans receivable were recorded at amortized cost, which consisted of the outstanding unpaid principal balance, net of unamortized costs and fees directly associated with the origination of the loan.

Interest income on the Company’s mortgage loans receivable was recognized over the life of the applicable investment using the interest method.

Origination costs and fees directly related to the mortgage loans receivable were amortized over the term of the loan as an adjustment to interest income.

2016-13, Financial Instruments - Credit Losses (Subtopic 326) (“ASU 2016-13”), mortgage loans receivable were recorded at

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

amortized cost, which consisted of the outstanding unpaid principal balance, net of unamortized costs and fees directly associated with origination of the loans.

Interest income on the Company’s mortgage loans receivable was recognized over the life of the applicable investment using the interest method.

Origination costs and fees directly related to the mortgage loans receivable were amortized over the term of the loan as an adjustment to interest income.

The Company evaluated at each reporting period each of its other real estate investments for indicators of impairment.

1 unchanged sentence

A reserve would be established for the excess of the carrying value of the investment over its fair value.

Upon adoption of ASU 2016-13, the Company elected to account for these instruments under the fair value option, as discussed below, and the fair value of these instruments as recorded in the accompanying condensed consolidated balance sheet includes any unpaid accrued interest.

Interest income is recognized as earned within interest and other income in the condensed consolidated income statement.

As of June 30, 2020, the Company had one mortgage loan receivable for which it had elected the fair value option upon origination.

Instruments for which the fair value option has been elected are measured at fair value on a recurring basis with changes in fair value recognized in other loss on the Company’s condensed consolidated income statements.

Interest income is recognized as earned within interest and other income in the condensed consolidated income statements.

Income Taxes —The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”).

3 unchanged sentences

If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions.

Recent Accounting Standards Adopted by the Company —In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, that changes the impairment model for most financial instruments by requiring companies to recognize an allowance for expected credit losses, rather than incurred losses as required currently by the other-than-temporary impairment model.

Recent Accounting Standards Adopted by the Company —In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, that changes the impairment model for most financial instruments by requiring companies to recognize an allowance for expected credit losses, rather than incurred losses as previously required by the other-than-temporary impairment model.

ASU 2016-13 applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans receivable, held-to-maturity debt securities, net investments in leases, and off-balance-sheet credit exposures (e.g., loan commitments).

9 unchanged sentences

With the Company’s primary business being leasing real prope rty to third-party tenants, the majority of receivables that arise in the ordinary course of business qualify as operating leases and are not in the scope of ASU 2016-13.

However, based on the instruments held upon adoption on January 1, 2020, the standard applies to the Company’s mortgage loans receivable, for which the Company elected the fair value option as provided for by ASU 2019-05.

These instruments will be measured at fair value on a recurring basis with changes in fair value recognized in other income on the Company’s condensed consolidated income statements.

However, based on the instruments held upon adoption on January 1, 2020, the standard applied to the Company’s then outstanding mortgage loans receivable, for which the Company elected the fair value option as provided for by ASU 2019-05.

In August 2018, the FASB issued ASU No.

2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”) , which modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures.

ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted.

ASU 2018-13 was effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted.

The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.

2 unchanged sentences

Adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.

REAL ESTATE INVESTMENTS, NET

The following table summarizes the Company’s investment in owned properties as of March 31, 2020 and December 31, 2019 (dollars in thousands):

Recent Accounting Pronouncements — In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), that provides

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

March 31, 2020 December 31, 2019

optional relief to applying reference rate reform to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”), which will be discontinued by the end of 2021.

The amendments in this update are effective immediately and may be applied through December 31, 2022.

The Company is still evaluating the impact of ASU 2020-04, but does not expect the adoption of the standard to have a material impact on the Company’s consolidated financial statements.

REAL ESTATE INVESTMENTS, NET

The following table summarizes the Company’s investment in owned properties as of June 30, 2020 and December 31, 2019 (dollars in thousands):

June 30, 2020 December 31, 2019

Land $ 208,231 $ 204,154

5 unchanged sentences

Real estate investments, net $ 1,420,112 $ 1,414,200

As of March 31, 2020 , the Company’s 212 facilities wer e leased to various operators under triple-net leases.

All of these leases contain annual escalators based on CPI, some of which are subject to a cap, or fixed rent escalators.

As of March 31, 2020, the Company has one independent living facility that the Company owns and operates.

As of March 31, 2020, the Company’s total future minimum rental revenues for all of its tenants, excluding operating expense reimbursements, were (dollars in thousands):

2020 (nine months) $ 125,502

As of June 30, 2020 , 212 of the Company’s facilities wer e leased to various operators under triple-net leases.

All of these leases contain annual escalators based on the percentage change in the Consumer Price Index (but not less than zero), some of which are subject to a cap, or fixed rent escalators.

As of June 30, 2020, the Company has one independent living facility that the Company owns and operates.

As of June 30, 2020, the Company’s total future minimum rental revenues for all of its tenants, excluding operating expense reimbursements, were (dollars in thousands):

2020 (six months) $ 84,161

Thereafter 966,894

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

Recent Real Estate Acquisitions

The following table summarizes the Company’s acquisitions for the three months ended March 31, 2020 (dollars in thousands):

The following table summarizes the Company’s acquisitions for the six months ended June 30, 2020 (dollars in thousands):

Type of Property Purchase Price (1)

12 unchanged sentences

In April 2020, the mortgage loan was settled with $ 18.9 million in cash and a new mortgage loan for $ 13.9 million .

See Note 12, Subsequent Events , and Note 4, Other Real Estate Investments, Net, for further detail.

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

In July 2020, the Company received prepayment in full, including accrued interest, for the new $ 13.9 million mortgage loan .

See Note 4, Other Real Estate Investments, Net, for further detail on the new mortgage loan.

OTHER REAL ESTATE INVESTMENTS, NET

5 unchanged sentences

In January 2020, the Company purchased the skilled nursing facility for approximately $ 18.7 million, which included capitalized acquisition costs.

The Company paid $ 15.0 million after receiving back its initial investment of $ 2.3 million and cumulative contractual preferred return through January 17, 2020, the acquisition date, of $ 1.4 million, of which less than $ 0.1 million was recognized as interest income during the three months ended March 31, 2020.

As of March 31, 2020, the Company had no remaining preferred equity investments.

Mortgage Loans Receivable —In July 2019, the Company provided MCRC, LLC a real estate loan secured by a 176 -bed skilled nursing facility in Manteca, California for $ 3.0 million, which bears a fixed interest rate of 8 % and requires monthly interest payments.

The Company did not recognize any interest income during the three months ended June 30, 2020 related to preferred equity investments.

As of June 30, 2020, the Company had no remaining preferred equity investments.

Mortgage Loans Receivable —In July 2019, the Company provided MCRC, LLC a real estate loan secured by a 176 -bed skilled nursing facility in Manteca, California for $ 3.0 million, which bore a fixed interest rate of 8 % and required monthly interest payments.

Concurrently, the Company entered into a purchase and sale agreement to purchase the Manteca facility from MCRC, LLC for approximately $ 16.4 million subject to normal diligence and other contingencies.

The loan documents provide for a maturity date of the earlier to occur of the closing date of the acquisition, or five business days following the termination of the purchase and sale agreement.

MCRC, LLC breached its obligation to sell the Manteca facility to the Company on the terms outlined in the purchase and sale agreement and, as a result, the Company has commenced non-judicial foreclosure proceedings with respect to the Manteca facility.

The Company expects the Manteca facility to go to auction in 2020 at which point the Company expects to either purchase the facility or be repaid the loan and accrued interest.

The loan documents provided for a maturity date of the earlier to occur of the closing date of the acquisition, or five business days following the termination of the purchase and sale agreement.

MCRC, LLC breached its obligation to sell the Manteca facility to the Company on the terms outlined in the purchase and sale agreement and to repay the real estate loan upon its stated maturity.

As a result, the Company commenced non-judicial foreclosure proceedings with respect to the Manteca facility.

In January 2020, the borrower further collateralized the loan by causing one of its affiliates to grant the Company a deed of trust in the real estate and improvements that constitute the Palm Gardens Assisted Living Facility in Yolo County, California.

The Company has not yet commenced nonjudicial foreclosure proceedings against the owner of the Palm Gardens facility.

In September 2019, the Company provided affiliates of CommuniCare Family of Companies (“CommuniCare”) a $ 26.5 million loan secured by mortgages on the three skilled nursing facilities sold to CommuniCare , which bears a fixed interest rate of 10 %.

During the three months ended June 30, 2020, payment for the loan principal and accrued interest, including default interest, as well as reimbursement for attorney’s fees and certain other costs of suit, were received in full by the Company and, as a result, the Company withdrew all foreclosure-related proceedings related to the Manteca facility loan.

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

In September 2019, the Company provided affiliates of CommuniCare Family of Companies (“CommuniCare”) a $ 26.5 million loan secured by mortgages on three skilled nursing facilities sold by the Company to CommuniCare , which bears a fixed interest rate of 10 %.

The mortgage loan, which requires CommuniCare to make monthly interest payments, was set to mature on February 29, 2020 and included an option to be prepaid before the maturity date.

In January 2020, the Company amended the mortgage loan’s maturity date to April 30, 2020.

See Note 12, Subsequent Events , for a discussion of the extension of the loan’s maturity date in April 2020.

In April 2020, the Company amended the mortgage loan’s maturity date to May 29, 2020.

During the three months ended June 30, 2020, payment for the mortgage loan and accrued interest was received in full by the Company.

In February 2020, the Company provided subsidiaries of Cascade a $ 32.4 million loan secured by mortgages on the six skilled nursing facilities formerly operated by affiliates of Metron sold to Cascade in February 2020, as discussed in Note 3, Real Estate Investments, Net.

The mortgage loan bore an interest at 7.5 % and had a maturity date of March 31, 2020.

In April 2020, the mortgage loan was settled with $ 18.9 million in cash and a new mortgage loan for $ 13.9 million.

The mortgage loan bore interest at a fixed rate of 7.5 % and had a maturity date of March 31, 2020.

In April 2020, the mortg age loan was settled in connection with a new mortgage loan transaction between the Company and a third-party institutional lender as co-lenders, pursuant to which the Company received $ 18.9 million in cash and a new mortgage loan for $ 13.9 million.

The new mortgage loan with Cascade was secured by the same six skilled nursing facilities purchased by Cascade and was fo r a combined principal amount of $ 33.9 million, with the Company’s $ 13.9 million portion of the indebtedness initially bearing interest at a variable rate equal to LIBOR plus 4.00 %, subject to a LIBOR floor of 1.75 %.

The new mortgage loan had a maturity date of April 29, 2022 and included two six -month extension options.

In July 2020, prepayment for the mortgage loan of $ 13.9 million and accrued interest was received in full by the Company.

See Note 12, Subsequent Events , for further detail.

During the three months ended March 31, 2020 and 2019, the Company recognized $ 1.1 million and $ 0.3 million, respectively, of interest income related to the mortgage loans.

During the three and six months ended June 30, 2020, the Company recognized $ 0.9 million and $ 2.0 million, respectively, of interest income related to its mortgage loans.

During the three and six months ended June 30, 2019, the Company recognized $ 0.5 million and $ 1.0 million , respectively, of interest income related to its mortgage loans.

FAIR VALUE MEASUREMENTS

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Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

Level 3 – Unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

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The Company does not expect that changes in classifications between levels will be frequent.

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

Items Measured at Fair Value on a Recurring Basis

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2020, aggregated by the level in the fair value hierarchy within which those instruments fall (dollars in thousands):

Level 1 Level 2 Level 3 Balance as of March 31, 2020

Mortgage loans receivable $ — $ — $ 61,753 $ 61,753

Mortgage loans receivable :

The fair values of the mortgage loans receivable were estimated using an internal valuation model that considered the expected future cash flows of the investments, the underlying collateral value, market interest rates and other credit enhancements.

As such, the Company classifies these instruments as Level 3 due to the significant unobservable inputs used in determining the fair value of the underlying collateral which includes capitalization rates in the range of 12 % - 13 %.

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2020, aggregated by the level in the fair value hierarchy within which those instruments fall (dollars in thousands):

Level 1 Level 2 Level 3 Balance as of June 30, 2020

Mortgage loan receivable $ — $ — $ 13,924 $ 13,924

Mortgage loan receivable :

The fair value of the mortgage loan receivable was estimated using an internal valuation model that considered the expected future cash flows of the investment, the underlying collateral value, market interest rates and other credit enhancements.

As such, the Company classifies the instrument as Level 3 due to the significant unobservable inputs used in determining the fair value of the underlying collateral which includes capitalization rates in the range of 12 % - 13 %.

A change in these rates could materially impact the estimated fair value of such estimates.

The fair value is not sensitive to changes in market interest rates due to the short term nature of the loans and the recent issuance of the notes at market interest rates.

As of March 31, 2020, the aggregate fair value of loans that are 90 days or more past due is $ 2.4 million, and the aggregate unpaid principal balance of such loans is $ 2.4 million.

For the three months ended March 31, 2020 and 2019, there were no changes in assets and liabilities with Level 3 inputs in the fair value hierarchy.

The fair value is not sensitive to changes in market interest rates due to the short term nature of the loan and the recent issuance of the note at market interest rates.

As of June 30, 2020, the Company did no t have any loans that were 90 days or more past due and, subsequent to June 30, 2020 the Company received prepayment in full, including accrued interest, for the mortgage loan.

See Note 12, S ubsequent Events , for further detail.

For the three and six months ended June 30, 2020 and 2019, there were no changes in assets and liabilities with Level 3 inputs in the fair value hierarchy.

Items Measured at Fair Value on a Non-Recurring Basis

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Specifically, t he fair value of the real estate investment is based on current market conditions and considers matters such as the forecasted operating cash flows, lease coverage ratios, capitalization rates, comparable sales data, and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers.

For the three months ended March 31, 2020 and 2019, there were no real estate assets deemed to be impaired.

For the three and six months ended June 30, 2020 and 2019, there were no real estate assets deemed to be impaired.

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

Items Disclosed at Fair Value

1 unchanged sentence

The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments.

A summary of the face values, carrying amounts and fair values of the Company’s financial instruments as of March 31, 2020 and December 31, 2019 using Level 2 inputs for the Notes (as defined in Note 6, Debt, below), and Level 3 inputs, for all other financial instruments, is as follows (dollars in thousands):

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

March 31, 2020 December 31, 2019

A summary of the face values, carrying amounts and fair values of the Company’s financial instruments as of June 30, 2020 and December 31, 2019 using Level 2 inputs for the Notes (as defined in Note 6, Debt, below), and Level 3 inputs, for all other financial instruments, is as follows (dollars in thousands):

June 30, 2020 December 31, 2019

Value Carrying

6 unchanged sentences

Senior unsecured notes payable 2 $ 300,000 $ 296,290 $ 306,000 $ 300,000 $ 295,911 $ 312,750

(1) On January 1, 2020, the Company elected the fair value option as provided for by ASU 2019-05 for its mortgage loans receivable.

These instruments will be measured at fair value on a recurring basis with changes in fair value recognized in other income on the Company’s condensed consolidated income statements.

(1) The Company elected the fair value option for the mortgage loan receivable that was outstanding as of June 30, 2020 .

See “Items Measured at Fair Value on a Recurring Basis” above.

Cash and cash equivalents, accounts and other receivables, other loans receivable, and accounts payable and accrued liabilities:

2 unchanged sentences

The fair values approximate their carrying values as the interest rates are variable and approximate prevailing market interest rates for similar debt arrangements.

The following table summarizes the balance of the Company’s indebtedness as of March 31, 2020 and December 31, 2019 (dollars in thousands):

March 31, 2020 December 31, 2019

The following table summarizes the balance of the Company’s indebtedness as of June 30, 2020 and December 31, 2019 (dollars in thousands):

June 30, 2020 December 31, 2019

Principal Amount Deferred Loan Fees Carrying Value Principal Amount Deferred Loan Fees Carrying Value

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Interest on the Notes is payable on June 1 and December 1 of each year.

The Issuers may redeem the Notes any time before June 1, 2020 at a redemption price of 100 % of the principal amount of the Notes redeemed plus accrued and unpaid interest on the Notes, if any, to, but not including, the redemption date, plus a “make-whole” premium described in the indenture governing the Notes and, at any time on or after June 1, 2020, at the redemption prices set forth in the indenture.

At any time on or before June 1, 2020, up to 40 % of the aggregate principal amount of the Notes may be redeemed with the net proceeds of certain equity offerings if at least 60 % of the originally issued aggregate principal amount of the Notes remains outstanding.

In such case, the redemption price will be equal to 105.25 % of the aggregate principal amount of the Notes to be redeemed plus accrued and unpaid interest, if any, to, but not including, the redemption date.

As of June 1, 2020, the Issuers may redeem the Notes any time at the redemption prices set forth in the indenture.

If certain changes of control of the Company occur, holders of the Notes will have the right to require the Issuers to repurchase their Notes at 101 % of the principal amount plus accrued and unpaid interest, if any, to, but not including, the repurchase date.

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The indenture also contains customary events of default.

As of March 31, 2020, the Company was in compliance with all applicable financial covenants under the indenture.

As of June 30, 2020, the Company was in compliance with all applicable financial covenants under the indenture.

Unsecured Revolving Credit Facility and Term Loan

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In addition, the Operating Partnership will pay a facility fee on the revolving commitments under the Revolving Facility ranging from 0.15 % to 0.35 % per annum, based on the debt to asset value ratio of the Company and its consolidated subsidiaries (unless the Company obtains certain specified investment grade ratings on its senior long-term unsecured debt and the Operating Partnership elects to decrease the applicable margin as described above, in which case the Operating Partnership will pay a facility fee on the revolving commitments ranging from 0.125 % to 0.30 % per annum based on the credit ratings of the Company’s senior long-term unsecured debt).

As of March 31, 2020, the Operating Partnership had $ 200.0 million outstanding under the Term Loan and $ 75.0 million outstanding under the Revolving Facility.

As of June 30, 2020, the Operating Partnership had $ 200.0 million outstanding under the Term Loan and no borrowings outstanding under the Revolving Facility.

CARETRUST REIT, INC.

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The Amended Credit Agreement also contains certain customary events of default, including the failure to make timely payments under the Amended Credit Facility or other material indebtedness, the failure to satisfy certain covenants (including the financial maintenance covenants), the occurrence of change of control and specified events of bankruptcy and insolvency.

As of March 31, 2020, the Company was in compliance with all applicable financial covenants under the Amended Credit Agreement.

As of June 30, 2020, the Company was in compliance with all applicable financial covenants under the Amended Credit Agreement.

At-The-Market Offering —On March 10, 2020, the Company entered into a new equity distribution agreement to issue and sell, from time to time, up to $ 500.0 million in aggregate offering price of its common stock through an “at-the-market” equity offering program (the “New ATM Program”).

In connection with the entry into the equity distribution agreement and the commencement of the New ATM Program, the Company’s “at-the-market” equity offering program pursuant to the Company’s prior equity distribution agreement, dated as of March 4, 2019, was terminated (the “Prior ATM Program”).

There was no Prior ATM Program or New ATM Program activity for the three months ended March 31, 2020.

As of March 31, 2020, the Company had $ 500.0 million available for future issuances under the New ATM Program.

There was no New ATM Program or Prior ATM Program activity (or activity under any predecessor at-the-market equity offering programs) for the three months ended June 30, 2020 and 2019 or for the six months ended June 30, 2020.

The following table summarizes predecessor at-the-market equity offering program activity for the six months ended June 30, 2019 (in thousands, expect per share amounts):

For the Six Months Ended

June 30, 2019

Number of shares 2,459

Average sales price per share $ 19.48

Gross proceeds* $ 47,893

*Total gross proceeds is before $ 0.6 million of commissions paid to the sales agents during the six months ended June 30, 2019 under the predecessor at-the-market equity offering program.

As of June 30, 2020, the Company had $ 500.0 million available for future issuances under the New ATM Program.

Share Repurchase Program —On March 20, 2020, the Company’s Board of Directors authorized a share repurchase program to repurchase up to $ 150.0 million of outstanding shares of the Company’s common stock (the “Repurchase Program”).

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The Company expects to finance any share repurchases under the Repurchase Program using available cash and may also use short-term borrowings under the Revolving Facility.

The Company did not repurchase any shares of common stock under the Repurchase Program during the three months ended March 31, 2020.

The Company did no t repurchase any shares of common stock under the Repurchase Program during the three and six months ended June 30, 2020 .

The Repurchase Program may be modified, discontinued or suspended at any time.

Dividends on Common Stock — The following table summarizes the cash dividends on the Company’s common stock declared by the Company’s Board of Directors for the first three months of 2020 (dollars in thousands, except per share amounts):

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

Dividends on Common Stock — The following table summarizes the cash dividends on the Company’s common stock declared by the Company’s Board of Directors for the first six months of 2020 (dollars in thousands, except per share amounts):

For the Three Months Ended

March 31, 2020

March 31, 2020 June 30, 2020

Dividends declared per share $ 0.25 $ 0.25

Dividends payment date April 15, 2020

Dividends payment date April 15, 2020 July 15, 2020

Dividends payable as of record date $ 23,931 $ 23,931

Dividends record date March 31, 2020

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

Dividends record date March 31, 2020 June 30, 2020

STOCK-BASED COMPENSATION

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These restricted shares are subject to a time vesting provision only and the Company does not recognize any stock compensation expense associated with these awards.

As of March 31, 2020, there we re 1,760 un vested restricted stock awards outstanding that were issued in connection with the Spin-Off.

As of June 30, 2020, there we re 1,760 un vested restricted stock awards outstanding that were issued in connection with the Spin-Off.

In January 2020 and March 2020, the Compensation Committee of the Company’s Board of Directors granted 27,000 and 107,790 shares of restricted stock, respectively, to officers and employees.

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The amount of performance awards that will ultimately vest is dependent on the Company’s Normalized Funds from Operations (“NFFO”) per share, as defined by the Compensation Committee, meeting or exceeding fiscal year over year growth of 5.0 % or greater.

In April 2020, the Compensation Committee of the Company's Board of Directors gra nted 27,611 shares of restricted stock to members of the Board of Directors.

Each share had a fair market value on the date of grant o f $ 16.48 p er share, based on the c losing market price of the Company's common stock on that date, and the shares vest in full on the earlier to occur of April 29, 2021 or the Company’s 2021 Annual Meeting of Stockholders.

The following table summarizes the stock-based compensation expense recognized (dollars in thousands):

For the Three Months Ended March 31,

For the Three Months Ended June 30, For the Six Months Ended June 30,

2020 2019 2020 2019

Stock-based compensation expense $ 963 $ 1,147 $ 1,847 $ 2,141

As of March 31, 2020, ther e was $ 8.3 million of unamortized stock-based compensation expense related to unvested awards and the weighted-average remaining vesting period of such awards was 3.0 years.

As of June 30, 2020, ther e was $ 7.5 million of unamortized stock-based compensation expense related to unvested awards and the weighted-average remaining vesting period of such awards was 2.8 years .

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

EARNINGS PER COMMON SHARE

The following table presents the calculation of basic and diluted earnings per common share (“EPS”) for the Company’s common stock for the three months ended March 31, 2020 and 2019, and reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS (amounts in thousands, except per share amounts):

For the Three Months Ended March 31,

The following table presents the calculation of basic and diluted earnings per common share (“EPS”) for the Company’s common stock for the three and six months ended June 30, 2020 and 2019, and reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS (amounts in thousands, except per share amounts):

For the Three Months Ended June 30, For the Six Months Ended June 30,

2020 2019 2020 2019

Net income $ 18,935 $ 19,698 $ 38,260 $ 35,751

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Earnings per common share, diluted $ 0.20 $ 0.21 $ 0.40 $ 0.39

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

The Company’s unvested restricted shares associated with its incentive award plan and unvested restricted shares issued to employees of Ensign at the Spin-Off have been excluded from the above calculation of earnings per diluted share for the three months ended March 31, 2020 and 2019, when their inclusion would have been anti-dilutive.

The Company’s unvested restricted shares associated with its incentive award plan and unvested restricted shares issued to employees of Ensign at the Spin-Off have been excluded from the above calculation of earnings per diluted share for the three and six months ended June 30, 2020 and 2019, when their inclusion would have been anti-dilutive.

COMMITMENTS AND CONTINGENCIES

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Claims and lawsuits may include matters involving general or professional liability asserted against the Company’s tenants, which are the responsibility of the Company’s tenants and for which the Company is entitled to be indemnified by its tenants under the insurance and indemnification provisions in the applicable leases.

Capital expenditures for each property leased under the Company’s triple-net leases are generally the responsibility of the tenant, except that, for the facilities leased to subsidiaries of Ensign under eight master leases, the tenant will have an option to require the Company to finance certain capital expenditures up to an aggregate of 20 % of the Company’s initial investment in such property, subject to a corresponding rent increase at the time of funding.

For the Company’s other triple-net master leases, the tenants also have the option to request capital expenditure funding that would generally be subject to a corresponding rent increase at the time of funding, which are subject to tenant compliance with the conditions to the Company’s approval and funding of their requests.

As of March 31, 2020, the Company had committed to fund expansions, construction and capital improvements at certain triple-net leased facilities totaling $ 16.4 million , of which $ 15.1 million is subject to rent increase at the time of funding.

Capital expenditures for each property leased under the Company’s triple-net leases are generally the responsibility of the tenant, except that, for the facilities leased to subsidiaries of Ensign and Pennant, the tenant will have an option to require the Company to finance certain capital expenditures up to an aggregate of 20 % of the Company’s initial investment in such property, subject to a corresponding rent increase at the time of funding.

For the Company’s other triple-net master leases, subject to approval by the Company, the tenants may request capital expenditure funding that would generally be subject to a corresponding rent increase at the time of funding and which are subject to tenant compliance with the conditions to the Company’s approval and funding of their requests.

As of June 30, 2020, the Company had committed to fund expansions, construction and capital improvements at certain triple-net leased facilities totaling $ 13.2 million, of which $ 12.4 million is subject to rent increase at the time of funding.

CONCENTRATION OF RISK

Major operator concentrations – As of March 31, 2020, Ensign leased 85 skilled nursing, multi-service campuses, assisted living and independent living facilities which had a tota l of 8,874 op erational beds and are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington.

The four states in which Ensign leases the highest concentration of properties as of March 31, 2020 are California, Texas, Utah and Arizona.

During the three months ended March 31, 2020 and 2019 Ensign represe nted 32 % and 40 %, resp ectively, of the Company’s rental income, exclusive of operating expense reimbursements.

Major operator concentrations – As of June 30, 2020, Ensign leased 85 skilled nursing, multi-service campuses, assisted living and independent living facilities which had a tota l of 8,882 beds and units and are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington.

The four states in which Ensign leases the highest concentration of properties by rental revenues as of June 30, 2020 are California, Texas, Arizona and Utah.

During both the three and six months ended June 30, 2020 Ensign represented 32 % of the Company’s rental income, exclusive of operating

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

expense reimbursements.

During the three and six months ended June 30, 2019 Ensign represented 34 % and 37 %, respectively, of the Company’s rental income, exclusive of operating expense reimbursements.

Ensign is subject to the registration and reporting requirements of the SEC and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited financial information.

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The Company has not verified this information through an independent investigation or otherwise.

As of March 31, 2020, Priority Management Group (“PMG”) leased 15 skilled nursing facilities which had a total of 2,145 b eds and units and are located in Louisiana and Texas.

During the three months ended March 31, 2020 and 2019, PMG represent ed 16 % and 8 % , respectively, of the Company’s rental income, exclusive of operating expense reimbursements.

As of June 30, 2020, Priority Management Group (“PMG”) leased 15 skilled nursing and campus facilities which had a total of 2,145 beds and units, and are located in Louisiana and Texas.

During both the three and six months ended June 30, 2020, PMG represent ed 17 % of the Company’s rental income, exclusive of operating expense reimbursements.

During the three and six months ended June 30, 2019 PMG represented 15 % and 12 %, respectively, of the Company’s rental income, exclusive of operating expense reimbursements.

SUBSEQUENT EVENTS

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The Company evaluates subsequent events up until the date the condensed consolidated financial statements are issued.

Amended Agreements

In April 2020, the Company amended its loan agreement secured by mortgages on the three skilled nursing facilities sold to CommuniCare, as discussed in Note 4, Other Real Estate Investments, Net .

The amended agreement has a new maturity d ate of May 29, 2020.

In April 2020, the mortgage loan provided to subsidiaries of Cascade in the amount of $ 32.4 million was settled in connection with a new mortgage loan transaction engaged in by the Company and a third-party institutional lender as co-

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

lenders, pursuant to which the Company received $ 18.9 million in cash and a new promissory note in the amount of $ 13.9 million.

The new mortgage loan with Cascade is secured by the six skilled nursing facilities purchased by Cascade (as discussed in Note 3, Real Estate Investments, Net ) and is for a combined principal amount of $ 33.9 million, with the Company’s $ 13.9 million portion of the indebtedness initially bearing interest at an interest rate equal to LIBOR plus 4.00 %, subject to a LIBOR floor of 1.75 %.

The new mortgage loan has a maturity date of April 29, 2022 and includes two six -month extension options.

Mortgage Loan Receivable

In July 2020, the Company received prepayment in full, including accrued interest, for the $ 13.9 million mortgage loan provided to subsidiaries of Cascade in April 2020.

See Note 4, Other Real Estate Investments, Net, for further discussion .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements