What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-07 · 148 added, 108 removed, 140 unchanged (65% of the section changed)

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CareTrust REIT is a self-administered, publicly-traded REIT engaged in the ownership, acquisition, development and leasing of seniors housing and healthcare-related properties.

As of March 31, 2020, we 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 85 facilities leased to Ensign had a total of 8,874 operational beds and units which are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington and the 127 remaining leased properties had a total of 12,778 operational beds and units and are located in California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Louisiana, M aryland, Michigan, Minnesota, Montana, New Mexico, North Carolina, North Dakota, Ohio, Oregon, South Dakota, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin.

As of June 30, 2020, we 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 85 facilities leased to Ensign had a total of 8,882 operational beds and units which are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington and the 127 remaining leased properties had a total of 12,777 operational beds and units and are located in Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Louisiana, M aryland, Michigan, Minnesota, Montana, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oregon, South Dakota, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin.

We also own and operate one independent living facility (“ILF”), which had a total of 168 units located in Texas.

As of March 31, 2020, we also had three mortgage loans receivable of $61.8 million .

As of June 30, 2020, we also had one mortgage loan receivable of $13.9 million .

We generate revenues primarily by leasing healthcare-related properties to healthcare operators in triple-net lease arrangements, under which the tenant is solely responsible for the costs related to the property (including property taxes, insurance, and maintenance and repair costs).

We conduct and manage our business as one operating segment for internal reporting and internal decision-making purposes.

We expect to grow our portfolio by pursuing opportunities to acquire

additional properties that will be leased to a diverse group of local, regional and national healthcare providers, which may include Ensign, as well as senior housing operators and related businesses.

We conduct and manage our business as one operating segment for internal

reporting and internal decision-making purposes.

We expect to grow our portfolio by pursuing opportunities to acquire additional properties that will be leased to a diverse group of local, regional and national healthcare providers, which may include Ensign, as well as senior housing operators and related businesses.

We also anticipate diversifying our portfolio over time, including by acquiring properties in different geographic markets, and in different asset classes.

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Moreover, our tenants have sole discretion with respect to the day-to-day operation of the facilities they lease from us, and how and whether to implement any observation we may share with them.

We also periodically monitor the overall financial and operating strength of our operators.

We also actively monitor the overall occupancy, skilled mix, and other operating metrics of our tenants on at least a monthly basis including, beginning in the quarter ended June 30, 2020, any stimulus funds received by each tenant.

We have replaced tenants in the past, and may elect to replace tenants in the future, if they fail to meet the terms and conditions of their leases with us.

The replacement operators may include operators with whom we have had no prior landlord-tenant relationship as well as current tenants with whom we are comfortable expanding our relationships.

We have also provided select operators with strategic capital for facility upkeep and modernization, as well as short-term working capital loans when they are awaiting licensure and certification or conducting turnaround work in one or more of our properties, and we may continue to do so in the future.

In addition, we periodically reassess the investments we have made and the operator relationships we have entered into, and have selectively disposed of facilities or investments, or terminated such relationships, and we expect to continue making such reassessments and, where appropriate, taking such actions.

The replacement tenants may include tenants with whom we have had no prior landlord-tenant relationship as well as current tenants with whom we are comfortable expanding our relationships.

We have also provided select tenants with strategic capital for facility upkeep and modernization, as well as short-term working capital loans when they are awaiting licensure and certification or conducting turnaround work in one or more of our properties, and we may continue to do so in the future.

In addition, we periodically reassess the investments we have made and the tenant relationships we have entered into, and have selectively disposed of facilities or investments, or terminated such relationships, and we expect to continue making such reassessments and, where appropriate, taking such actions.

Recent Developments

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.

Tenants of our properties operating pursuant to triple-net master leases, as well as our one ILF that we own and operate, have been adversely impacted, and we expect will continue to be adversely impacted, by the COVID-19 pandemic.

In recent months, the COVID-19 outbreak has spread globally, which 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.

Although some of these governmental restrictions have since been lifted or scaled back, a recent resurgence of COVID-19 has resulted in the reimposition of certain restrictions and may lead to other restrictions being implemented 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, our business, results of operations and financial condition may be adversely impacted by the COVID-19 pandemic.

Tenants of our properties operating pursuant to triple-net master leases, as well as the single ILF that we own and operate, have been adversely impacted, and we expect will continue to be adversely impacted, by the COVID-19 pandemic.

Our tenants are experiencing increased operating costs as a result of actions they are taking to prevent or mitigate the outbreak or spread of COVID-19 at their facilities, including in connection with their implementation of safety protocols and procedures, the cost of increased purchases of personal protective equipment and increased staffing costs.

To assist our tenants, we ordered approximately $1.2 million in personal protective equipment from March 27, 2020 to Ma y 7, 2020, that we are providing to our tenants at our volume-discounted cost to enable them to benefit from the cost efficiencies of our bulk order.

Occupancy levels at our facilities could decline primarily due to, among other among other things, (i) temporary suspensions on new admissions enacted by certain facilities, (ii) with respect to our skilled nursing facilities (“SNFs”), governmental restrictions requiring the temporary deferral of elective surgeries, and (iii) declines in inquiries and tours at our senior housing properties, deferred move-ins and increased move-outs due to concerns about possible COVID-19 outbreaks.

The higher o perating costs affecting our tenants may adversely impact the ability of our tenants to satisfy their rental obligations to us in full or on a timely basis.

However, approximately 99.3% of our contractual rent obligations due for April have been collected from our tenants.

Additionally, we also expect two of our three mortgage loans receivable to be repaid by the end of our second quarter 2020.

The following relief progra ms enacted by the government are expected to provide some benefits to our tenants:

To assist our tenants, we ordered approximately $1.2 million in personal protective equipment from March 27, 2020 to August 6, 2020, and provided it to our tenants at our volume-discounted cost to enable them to benefit from the cost efficiencies of our bulk order.

Occupancy levels at our senior housing facilities have remained relatively stable throughout the COVID-19 pandemic, while occupancy levels at our skilled nursing facilities (“SNFs”) have declined and may continue to decline primarily due to, among other things, (i) temporary suspensions on new admissions enacted by certain facilities, (ii) with respect to our SNFs, governmental restrictions that required the temporary deferral of elective surgeries in referring hospitals, and (iii) with respect to our senior housing properties, declines in inquiries and tours, deferred move-ins and increased move-outs due to concerns about possible COVID-19 outbreaks.

During the COVID-19 pandemic, the federal government temporarily suspended the three-day hospital stay requirement for a patient’s Medicare benefits to refresh.

Providers can now “skill in place,” eliminating the risk of transferring the patient to the hospital.

Because of this temporary rule change, skilled mix in some facilities has increased, while overall occupancy has declined.

An increase in skilled mix could, but may not necessarily, offset some or all of the adverse financial impact from a decline in occupancy.

The higher o perating costs affecting our tenants has adversely impacted and may continue to adversely impact the ability of our tenants to satisfy their rental obligations to us in full or on a timely basis.

Two SNF tenants proposed rent deferral s shortly after the pandemic was declared;

however, after undergoing a financial and operating performance review, and considering the impact of stimulus funding, both tenants determined that no rent deferral or other assistance was necessary.

One senior housing tenant recently proposed partial rent relief, and we are in ongoing discussions with that tenant.

While we have not seen a need to grant any rent relief to any tenant to date, future adverse changes to tenants’ operating fundamentals, or a reduction in or discontinuation of government support, could change our expectations.

Approximatel y 9 8.7 % of our contractual

rent obligations due for July have b een collected from our tenants before considering any cash deposits on-hand from which we may offset any shortfalls in rent received.

Additionally, all of our outstanding mortgage loans receivable were repaid in the second and third quarters of 2020 .

The following relief progra ms enacted by the government are expected to provide some benefits to our tenants and are subject to terms and conditions, including, but not limited to, attestation, recordkeeping and reporting requirements to Department of Health and Human Services (“HHS”):

• The Families First Coronavirus Response Act (“Families First Act”) - Under the Families First Act, a temporary 6.2% increase in Federal Medical Assistance Percentages (“FMAP”) was approved retroactive to January 1, 2020, and several states have directed FMAP funds to SNFs, which has included some of our tenants.

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Additionally, a Payroll Protection Program was established under the CARES Act to provide Small Business Administration loans to businesses with fewer than 500 employees that may be partially forgivable.

The CARES Act also includes a

temporary suspension from May 1, 2020 through December 31, 2020 of a 2% Medicare sequestration cut, and a deferral of the employer’s Social Security remittances through December 31, 2020.

The extent of the COVID-19 pandemic’s effect on our operational and financial performance, and the operational and financial performance of our 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.

The CARES Act also includes a temporary suspension from May 1, 2020 through December 31, 2020 of a 2% Medicare sequestration cut, and a deferral of the employer’s Social Security remittances through December 31, 2020.

The estimated federal and state COVID-19-related relief approved and received to date by our skilled nursing operators is $137.6 million.

In July 2020, the federal government announced that it would send point-of-care testing supplies for COVID-19 to all SNFs in the country.

In connection with the initiatives discussed above, the federal government will be requiring that all SNFs in states with a 5% positivity rate or greater test all SNF staff each week.

The new testing mandate may result in higher operating costs if the amount of tests received does not cover the amount of tests required by each facility.

The duration and extent of the COVID-19 pandemic’s effect on our operational and financial performance, and the operational and financial performance of our 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 our business, results of operations and financial condition could be material.

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In connection with the sale for $36.0 million, we received $3.5 million in cash and provided subsidiaries of Cascade Capital Group, LLC (“Cascade”), the purchaser of the properties, with a short-term mortgage loan secured by these properties for $32.4 million.

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

In connection with the sale, we recognized a loss of approximately $0.1 million.

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 , for further detail.

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

In connection with the sale, we recognized a loss of approximately $0.1 million during the three months ended March 31, 2020.

In April 2020, the mortgage loan was settled in connection with a new mortgage loan transaction between us and a third-party institutional lender as co-lenders, pursuant to which we 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 for a combined principal amount of $33.9 million, with our $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 us.

Recent Investments

From January 1, 2020 through May 7, 2020, we acquired one skilled nursing facility and one assisted living facility for approximately $26.1 million, which includes capitalized acquisition costs.

From January 1, 2020 through August 6, 2020, we acquired one skilled nursing facility and one assisted living facility for approximately $26.1 million, which includes capitalized acquisition costs.

These acquisitions are expected to generate initial annual cash revenues of approximately $2.3 million and an initial blended yield of approximately 8.7%.

See Note 3, Real Estate Investments, Net in the Notes to condensed consolidated financial statements for additional information.

5.25% Senior Notes due 2025 and Effect of Recent Regulation S-X Amendments

In connection with our outstanding 5.25% Senior Notes due 2025 (the “Notes”) and our previous issuance of registered debt securities and in accordance with Rule 3-10 of Regulation S-X, we presented certain condensed consolidating financial information with respect to us, as a guarantor of the Notes, our wholly owned subsidiaries that issued the Notes and our wholly owned subsidiaries that guaranteed the Notes in the financial statement footnotes of our prior Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.

In March 2020, the SEC adopted amendments to reduce and simplify the financial disclosure requirements for guarantors and issuers of guaranteed registered securities.

The amendments are effective January 4, 2021, but voluntary compliance with the amendments in advance of January 4, 2021 is permitted.

We have elected to comply with these amendments effective with this Quarterly Report on Form 10-Q.

As a result, we will no longer include in the financial statement footnotes of our Quarterly and Annual Reports on Form 10-Q and Form 10-K separate condensed consolidating financial information for our wholly owned subsidiaries who issued or guaranteed the Notes.

In addition, in accordance with the amendments adopted by the SEC, because the assets, liabilities and results of operations of the combined issuers and guarantors of the Notes are not materially different than the corresponding amounts presented in our condensed consolidated financial statements, we are also not required to present combined summary financial information regarding such subsidiary issuers and guarantors.

Below is a description of certain information regarding the Issuers and the Guarantors (each as defined below) of the Notes.

The Notes, issued by CTR Partnership, L.P.

(the “Operating Partnership”), and its wholly owned subsidiary, CareTrust Capital Corp.

(together with the Operating Partnership, the “Issuers”), on May 10, 2017 are jointly and severally, fully and unconditionally, guaranteed by CareTrust REIT, Inc., as the parent guarantor (the “Parent Guarantor”), and the wholly owned subsidiaries of the Parent Guarantor other than the Issuers (collectively, the “Subsidiary Guarantors” and, together with the Parent Guarantor, the “Guarantors”), subject to automatic release under certain customary circumstances, including if the Subsidiary Guarantor is sold or sells all or substantially all of its assets, the Subsidiary Guarantor is designated “unrestricted” for covenant purposes under the indenture governing the Notes, the Subsidiary Guarantor’s guarantee of other indebtedness which resulted in the creation of the guarantee of the Notes is terminated or released, or the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied.

The following provides information regarding the entity structure of the Parent Guarantor, the Issuers and the Subsidiary Guarantors:

CareTrust REIT, Inc.

– The Parent Guarantor was formed on October 29, 2013 in connection with the separation of Ensign’s healthcare business and its real estate business into two separate and independently publicly traded companies (the “Spin-Off”).

The Parent Guarantor was a wholly owned subsidiary of Ensign prior to the effective date of the Spin-Off on June 1, 2014.

The Parent Guarantor has not conducted any operations or had any business since the Spin-Off.

CTR Partnership, L.P.

and CareTrust Capital Corp.

– The Issuers, each of which is a wholly owned subsidiary of the Parent Guarantor, were formed on May 8, 2014 and May 9, 2014, respectively, in anticipation of the Spin-Off and the related transactions.

The Issuers did not conduct any operations or have any business prior to the date of the consummation of the Spin-Off related transactions.

The Operating Partnership directly invests in real estate and real estate related assets and therefore does not rely solely on the cash flow generated by the Subsidiary Guarantors and their ability to make cash available to the Issuers, by dividend or otherwise.

However, in the event that the earnings or available assets of the Issuers are insufficient, the Issuers’ ability to pay principal and interest on the Notes could be dependent on the cash flow generated by the Subsidiary Guarantors and their ability to make such cash available to the Issuers.

CareTrust Capital Corp., a co-issuer of the Notes, has no material assets and conducts no operations.

Therefore, it has no independent ability to service the interest and principal obligations under the Notes.

Subsidiary Guarantors – The Subsidiary Guarantors consist of all of the subsidiaries of the Parent Guarantor other than the Issuers.

The Parent Guarantor conducts a substantial portion of its business operations through the Subsidiary Guarantors, which include all of the entities that were wholly owned subsidiaries of Ensign prior to the consummation of the Spin-Off, among others.

The indenture contains customary covenants summarized below under “—Liquidity and Capital Resources—Indebtedness—Senior Unsecured Notes.” These covenants include a restriction on the ability of the Issuers and their restricted subsidiaries to pay dividends or other amounts to the Issuers, subject to certain other exceptions, unless:

(i) there is no default or event of default under the indenture;

(ii) the Issuers are in compliance with specified limitations on indebtedness under the indentures;

and (iii) the payments do not exceed a specified restricted payment basket.

Dividends or distributions are also permitted if the Parent Guarantor’s board of directors believes in good faith they are necessary to maintain Parent Guarantor’s REIT status or to avoid any excise tax or income tax imposed on Parent Guarantor, provided there is no default or event of default under the indenture.

Further, the Issuers and their restricted subsidiaries are not permitted to create or cause to become effective any encumbrance or restriction on the ability of the Issuers to, among other things, pay dividends or make distributions, pay indebtedness, make loans or advances to the Issuers or their restricted subsidiaries or transfer property or assets to the Issuers or their restricted subsidiaries, other than in connection with certain customary exceptions such as in respect of the indenture or the Amended Credit Facility.

See also “—Liquidity and Capital Resources—Indebtedness— Senior Unsecured Notes ” for further information about the Notes.

Results of Operations

Operating Results

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019:

Three Months Ended March 31, Increase

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019:

Three Months Ended June 30, Increase

(Decrease) Percentage

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General and administrative 4,762 4,606 156 3 %

Rental incom e .

The $1.6 million, or 4%, de crease in rental income is primarily due to a $ 2.2 million decrease in rental income due to the disposal of assets in September 2019 and February 2020, a $1.

4 million decrease in cash rents due to lease amendments and a $0.

4 million decrease in straight-line rent due to lease restructurings, partially offset by a $ 1.7 million increase in rental income from real estate investments made after July 1, 2019 , a $0.4 million increase in tenant reimbursements and $ 0.3 million from increases in rental rates for our existing tenants.

Independent livin g facilities.

The $0.3 million, or 31%, decrease in revenues from our ILFs was primarily due to the sale of one ILF to a third party and the lease of one ILF to Ensign concurrently with the previously announced separation of Ensign’s home health and hospice operations and substantially all of its senior living operations into a separate independent publicly traded company through the distribution of shares of common stock of The Pennant Group, Inc.

during the fourth quarter ended December 31, 201 9, partially offset by an increase in occupancy at our remaining ILF, Lakeland Hills Independent Living.

T he $0.2 million, or 24%, decrease in expenses was primarily for the same reasons indicated for the decrease in revenues .

Interest and other income.

The $0.1 million, or 12%, de crease in interest and other income was primarily due to a decrease in preferred return related to the repayment of a preferred equity investment in June 2019, and repayments of mortgage loans receivabl e by Covenant Care in August 2019 and Providence Group in December 2019, partially offset by interest income related to our mortgage loans receivable that we provided to Manteca in July 2019, CommuniCare Family of Companies in September 2019 and Cascade in February 2020.

See Note 4, Other Real Estate Investments, Net .

Depreciation and amortization .

The $0.2 million, or 1%, de crease in depreciation and amortization was primarily due to the disposal of assets, partially offset by new real estate investments, made after July 1, 2019.

Interest expe nse.

The $1.4 million, or 20%, decrease in interest expense was primarily due to lower weighted average interest rates and a lower weighted average debt balance for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Property taxes.

The $0.4 million, or 84%, increase was primarily due to new real estate investments, partially offset by the disposal of assets, made after July 1, 2019.

General and administrative expe nse.

The $0.2 million, or 3%, increase was primarily related to higher cash wages of $0.

3 million and an increase of $0.2 million in state franchise tax, partially offset by a decrease of $0.

2 million related to stock-based compensation and $0.1 million related to other corporate expenses .

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019:

Six Months Ended June 30, Increase

(Decrease) Percentage

(dollars in thousands)

Rental income $ 84,971 $ 82,470 $ 2,501 3 %

The $4.1 million, or 11%, increase in rental income is primarily due to $6.7 million in rental income from real estate investments made after April 1, 2019 and $1.1 million from increases in rental rates for our existing tenants, partially offset by a $1.7 million decrease in cash rents, a $1.5 million decrease in rental income due to the disposal of assets in September 2019 and February 2020, a $0.4 million decrease in straight-line rent and a $0.1 million decrease in tenant reimbursements.

Independent living facilities 1,240 1,747 (507) (29) %

Interest and other income 2,297 1,642 655 40 %

Depreciation and amortization 26,399 25,339 1,060 4 %

Interest expense 12,563 14,145 (1,582) (11) %

Property taxes 1,322 1,282 40 3 %

Independent living facilities 1,092 1,426 (334) (23) %

General and administrative 8,816 7,916 900 11 %

Rental income .

The $2.5 million, or 3%, increase in rental income is primarily due to $9.2 million in rental income from real estate investments made after January 1, 2019, $1.1 million from increases in rental rates for our existing tenants and a $0.3 million increase in tenant reimbursements, partially offset by a $3.5 million decrease in cash rents due to lease amendments and disposal of facilities, a $3.7 million decrease in rental income due to the disposal of assets in September 2019 and February 2020 and a $0.9 million decrease in straight-line rent due to lease restructurings.

Independent living facilities.

The $0.5 million, or 29%, decrease in revenues from our ILFs was primarily due to the sale of one ILF to a third party and the lease of one ILF to Ensign concurrently with the previously announced separation of Ensign’s home health and hospice operations and substantially all of its senior living operations into a separate independent publicly traded company through the distribution of shares of common stock of The Pennant Group, Inc.

during the fourth quarter ended December 31, 2019, partially offset by an increase in occupancy at Lakeland Hills Independent Living.

during the fourth quarter ended December 31, 2019, partially offset by an increase in occupancy at our remaining ILF, Lakeland Hills Independent Living.

The $0.3 million, or 23%, decrease in expenses was primarily for the same reasons indicated for the decrease in revenues.

Interest and other income.

The $0.8 million, or 177%, increase in interest and other income was primarily due to interest income related to our mortgage loans receivable that we provided to Manteca in July 2019, CommuniCare Family of Companies in September 2019 and Cascade in February 2020, partially offset by repayments of mortgage loans receivable by Covenant Care in August 2019 and Providence Group in December 2019.

The $0.7 million, or 40%, increase in interest and other income was primarily due to interest income related to our mortgage loans receivable that we provided to Manteca in July 2019, CommuniCare Family of Companies in September 2019 and Cascade in February 2020, partially offset by a decrease in preferred return related to the repayment of a preferred equity investment in June 2019, and repayments of mortgage loans receivable by Covenant Care in August 2019 and Providence Group in December 2019.

See Note 4, Other Real Estate Investments, Net.

Depreciation and amortization.

The $1.3 million, or 11%, increase in depreciation and amortization was primarily due to new real estate investments made after April 1, 2019, partially offset by the disposal of assets.

Interest expense.

The $0.1 million, or 2%, decrease in interest expense was primarily due to a lower weighted average debt balance and lower weighted average interest rates for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

The $1.1 million, or 4%, increase in depreciation and amortization was primarily due to new real estate investments made after January 1, 2019, partially offset by the disposal of assets.

Interest expens e.

The $1.6 million, or 11%, decrease in interest expense was primarily due to lower weighted average interest rates for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Property taxes.

The $0.3 million, or 41%, decrease was primarily due to the disposal of assets, partially offset by new real estate investments made after April 1, 2019.

General and administrative expense.

The $0.7 million, or 22%, increase was primarily related to higher cash wages of $0.8 million, partially offset by a decrease of $0.1 million related to stock-based compensation.

The property taxes primarily remained consistent due to new real estate investments, partially offset by the disposal of assets and transfer of assets to operators that make property tax payments directly to third party taxing authorities, made after January 1, 2019.

General and administrative expens e.

The $0.9 million, or 11%, increase was primarily related to higher cash wages of $1.1 million and an increase of $0.2 million in state franchise tax, partially offset by a decrease of $0.3 million related to stock-based compensation and $0.1 million related to other corporate expenses.

Liquidity and Capital Resources

To qualify as a REIT for federal income tax purposes, we are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, to our stockholders on an annual basis.

Accordingly, we intend to make, but are not contractually bound to make, regular quarterly dividends to common stockholders from cash flow from operating activities.

Accordingly, we intend to make, but are not contractually bound to make, regular quarterly

dividends to common stockholders from cash flow from operating activities.

All such dividends are at the discretion of our board of directors.

As of March 31, 2020, we had cash and cash equivalents of $23.9 million.

As of June 30, 2020, we had cash and cash equivalents of $5.8 million.

On March 10, 2020, we 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 our 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, our “at-the-market” equity offering program pursuant to our 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, we had $500.0 million available for future issuances under the New ATM Program.

As of March 31, 2020, we also had $75.0 million outstan ding under the Revolving Facility (as defined below).

We believe that our available cash, expected operating cash flows, and the availability under the New ATM Program and Amended Credit Facility (as defined below) will provide sufficient funds for our operations, anticipated scheduled debt service payments and dividend plans for at least the next twelve months.

There was no Prior ATM Program or New ATM Program activity for the three and six months ended June 30, 2020.

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

As of June 30, 2020, we also had no borrowings outstan ding under the Revolving Facility (as defined below), after repaying the outstanding balance of the Revolving Facility during the three months ended June 30, 2020.

We believe that our available cash, expected operating cash flows, and the availability under the New ATM Program and Amended Credit Facility (as defined below) will provide sufficient funds for our operations, anticipated scheduled debt service payments and projected dividend payments for at least the next twelve months.

We intend to invest in and/or develop additional healthcare properties as suitable opportunities arise and adequate sources of financing are available.

part, our existing cash, borrowings available to us under the Amended Credit Facility, future borrowings or the proceeds from sales of shares of our common stock pursuant to our New ATM Program or additional issuances of common stock or other securities.

We expect that future investments in and/or development of properties, including any improvements or renovations of current or newly-acquired properties, will depend on and will be financed by, in whole or in part, our existing cash, borrowings available to us under the Amended Credit Facility, future borrowings or the proceeds from sales of shares of our common stock pursuant to our New ATM Program or additional issuances of common stock or other securities.

In addition, we may seek financing from U.S.

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The following table presents selected data from our condensed consolidated statements of cash flows for the periods presented (dollars in thousands):

For the Three Months Ended March 31,

For the Six Months Ended June 30,

Net cash provided by operating activities $ 67,942 $ 61,738

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

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

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

Cash and cash equivalents, end of period $ 5,798 $ 2,629

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Net cash provided by operating activities increased $6.4 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to an increase of rental income due to acquisitions, increases in rental rates for existing tenants subsequent to March 31, 2019, increases in interest income related to our mortgage loans receivable and an increase in interest income distributed from our preferred equity investment.

Cash used in investing activities for the three months ended March 31, 2020 was primarily comprised of $27.0 million in acquisitions of real estate and investments in real estate mortgage loans and $2.4 million of improvement in real estate and purchases of furniture, fixtures and equipment, partially offset by $3.0 million of payments received from our preferred equity investment and mortgage and other loans receivable and $2.1 million in net proceeds from real estate sales.

Cash used in investing activities for the three months ended March 31, 2019 was primarily comprised of $64.5 million in acquisitions of real estate and investments in real estate mortgage loans.

Our cash flows used in financing activities for the three months ended March 31, 2020 was primarily comprised of $21.5 million in dividends paid and a $2.0 million net settlement adjustment on restricted stock, partially offset by $15.0 million in net borrowings under our Amended Credit Facility.

Our cash flows provided by financing activities for the three months ended March 31, 2019 was primarily comprised of $190.0 million in net borrowings under our Amended Credit Facility and Prior Credit Facility and $47.3 million in net proceeds from common stock sales under our Prior ATM Program, partially offset by $17.7 million in dividends paid and $4.4 million in payments of deferred financing costs.

Senior Unsecured Notes

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Net cash provided by o perating activities increased $6.2 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to an increase of rental income due to acquisitions, increases in rental rates for existing tenants subsequent to June 30 , 2019, increases in interest income related to our mortgage loans receivable and an increase in interest income distributed from our preferred equity investment.

Cash provided by investing acti vities for the six months ended June 30, 2020 was primarily comprised of $69.3 million of payments received from our preferred equity investment and mortgage and other loans receivable and $2.1 million in net proceeds from real estate sales, partially offset by $39.9 million in acquisitions of real estate and investments in real estate mortgage loans and $6.2 million of improvement in real estate and purchases of furniture, fixtures and equipment.

C ash used in investing activities for the six months ended June 30, 2019 was primarily comprised of $ 297.3 million in acquisitions of real estate and investments in real estate mortgage loans.

Our cash flows used in financing activities for the six months ended June 30, 2020 was primarily comprised o f $45.4 million in dividends paid , a $2.0 million net settlement adjustment on restricted stock, $0.4 million in costs paid for the issuance of common stock and $60.0 million in net repayments under our Amended Credit Facility.

Our cash flows provided by financing activities for the six months ended June 30, 2019 was primarily comprised of $ 50 .0 million in net borrowings under our Amended Credit Facility and Prior Credit Facility and $ 196.0 million in net proceeds from common stock sales under our predecessor at-the-market equity offering program and April 2019 equity offering, partially offset by $ 37.7 million in dividends paid and $4.

5 million in payments of deferred financing costs.

5.25% Senior Unsecured Notes due 2025 and Issuer and Guarantor Financial Information

On May 10, 2017, the Issuers completed a public offering of $300.0 million aggregate principal amount of the Notes.

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Interest on the Notes is payable on June 1 and December 1 of each year, beginning on December 1, 2017.

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 CareTrust REIT 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.

As de scribed above under “—5.25% Senior Notes due 2025 and Effect of Recent Regulation S-X Amendments,” the obligations under the Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by CareTrust REIT and certain of CareTrust R EIT’s wholly owned existing and, subject to certain exceptions, future material subsidiaries (other than the Issuers).

The Notes, issued by CTR Partnership, L.P.

(the “Operating Partnership”), and its wholly owned subsidiary, CareTrust Capital Corp.

In March 2020, the SEC adopted amendments to reduce and si mplify the financial disclosure requirements for guarantors and issuers of guaranteed registered securities.

The amendments are effective January 4, 2021, but voluntary compliance with the amendments in advance of January 4, 2021 is permitted.

We have elected to comply with these amendments as of January 1, 2020 .

The following provides information regarding the entity structure of the Parent Guarantor, the Issuers and the Subsidiary Guarantors:

CareTrust REIT, Inc.

The Parent Guarantor was a wholly owned subsidiary of Ensign prior to the effective date of the Spin-Off on June 1, 2014.

The Parent Guarantor has not conducted any operations or had any business since the Spin-Off.

CTR Partnership, L.P.

and CareTrust Capital Corp.

The Issuers did not conduct any operations or have any business prior to the date of the consummation of the Spin-Off related transactions.

CareTrust Capital Corp., a co-issuer of the Notes, has no material assets and conducts no operations.

Therefore, it has no independent ability to service the interest and principal obligations under the Notes.

Subsidiary Guarantors – The Subsidiary Guarantors consist of all of the subsidiaries of the Parent Guarantor other than the Issuers.

The indenture contains customary covenants such as limiting the ability of CareTrust REIT and its restricted subsidiaries to:

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incur or guarantee secured indebtedness;

pay dividends or distributions on, or redeem or repurchase, capital stock;

make certain investments or other restricted payments;

enter into transactions with affiliates;

merge or consolidate or sell all or substantially all of their assets;

and create restrictions on the ability of the Issuers and their restricted subsidiaries to pay dividends or other amounts to the Issuers.

merge or consolidate or sell all or substantially all of their assets, and pay dividends or distributions on, or redeem or repurchase, capital stock, including a restriction on the ability of the Issuers and their restricted subsidiaries to pay dividends or other amounts to the Issuers, subject to certain other exceptions, unless:

(i) there is no default or event of default under the indenture;

(ii) the Issuers are in compliance with specified limitations on indebtedness under the indentures;

and (iii) the payments do not exceed a specified restricted payment basket.

The indenture also requires CareTrust REIT and its restricted subsidiaries to maintain a specified ratio of unencumbered assets to unsecured indebtedness.

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The indenture also contains customary events of default.

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

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

Unsecured Revolving Credit Facility and Term Loan

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The Amended Credit Agreement, which amended and restated the Prior Credit Agreement, provides for:

(i) an unsecured revolving credit facility (the “Revolving Facility”) with revolving commitments in an aggregate principal amount of $600.0 million, including a letter of credit subfacility for 10% of the then available revolving commitments and a swingline loan subfacility for 10% of the then available revolving commitments and (ii) an unsecured term loan credit facility (the “Term Loan” and, together with the Revolving Facility, the “Amended Credit Facility”) in an aggregate principal amount of $200.0 million.

an unsecured term loan credit facility (the “Term Loan” and, together with the Revolving Facility, the “Amended Credit Facility”) in an aggregate principal amount of $200.0 million.

Borrowing availability under the Revolving Facility is subject to no default or event of default under the Amended Credit Agreement having occurred at the time of borrowing.

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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 off the credit ratings of the Company’s senior long-term unsecured debt).

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

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

The Revolving Facility has a maturity date of February 8, 2023, and includes, at our so le discretion, two, six-month extension options.

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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, we were in compliance with all applicable financial covenants under the Amended Credit Agreement.

Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of March 31, 2020 (in thousands):

The following table summarizes our contractual obligations and commitments as of June 30, 2020 (in thousands):

Payments Due by Period

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Total $ 604,237 $ 20,348 $ 40,243 $ 338,443 $ 205,203

(1) Amounts include interest payments of $86.6 million.

(2) Amounts include interest payments of $27.1 million.

(1) Amounts include interest payments o f $ 78 .

(2) Amounts include interest payments o f $ 19 .

(3) Amounts include payments related to the credit facility fee.

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We anticipate incurring average annual capital expenditures of $400 to $500 per unit in connection with the operations of our one ILF.

Capital expenditures for each property leased under our 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 us to finance certain capital expenditures up to an aggregate of 20% of our initial investment in such property, subject to a corresponding rent increase at the time of funding.

For our 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 our approval and funding of their requests.

As of March 31, 2020, we had committed to fund expansions, construction and capital improvements at certain triple-net leased facilities tota ling $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 our 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 us to finance certain capital expenditures up to an aggregate of 20% of our initial investment in such property, subject to a corresponding rent increase at the time of funding.

For our other triple-net master leases, subject to approval by us, 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 our approval and funding of their requests.

As of June 30, 2020, we 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 s ubject to rent increase at the time of funding.

Critical Accounting Policies and Estimates

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Please refer to “Critical Accounting Policies and Estimates” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 20, 2020, for further information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

There have been no material changes in such critical accounting policies during the three months ended March 31, 2020.

There have been no material changes in such critical accounting policies during the six months ended June 30, 2020.

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 2. Management’s Discussion and Analysis