CareTrust REIT, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements Certain statements in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements regarding: future financing plans, business strategies, growth prospects and operating and financial performance; expectations regarding the making of distributions and the payment of dividends; and compliance with and changes in governmental regulations. Words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “believe(s),” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to: (i) the COVID-19 pandemic and the measures taken to prevent its spread and the related impact on our business or the businesses of our tenants; (ii) the ability and willingness of our tenants to meet and/or perform their obligations under the triple-net leases we have entered into with them, including, without limitation, their respective obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities; (iii) the ability of our tenants to comply with applicable laws, rules and regulations in the operation of the properties we lease to them; (iv) the ability and willingness of our tenants to renew their leases with us upon their expiration, and the ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event we replace an existing tenant, as well as any obligations, including indemnification obligations, we may incur in connection with the replacement of an existing tenant; (v) the availability of and the ability to identify (a) tenants who meet our credit and operating standards, and (b) suitable acquisition opportunities, and the ability to acquire and lease the respective properties to such tenants on favorable terms; (vi) the ability to generate sufficient cash flows to service our outstanding indebtedness; (vii) access to debt and equity capital markets; (viii) fluctuating interest rates; (ix) the ability to retain our key management personnel; (x) the ability to maintain our status as a real estate investment trust (“REIT”); (xi) changes in the U.S. tax law and other state, federal or local laws, whether or not specific to REITs; (xii) other risks inherent in the real estate business, including potential liability relating to environmental matters and illiquidity of real estate investments; and (xiii) any additional factors included under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019, including in the section entitled “Risk Factors” in Item 1A of Part I of such report, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (the “SEC”). Forward-looking statements speak only as of the date of this report. Except in the normal course of our public disclosure obligations, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any statement is based. Overview 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 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 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 19 Table of Contents 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. In addition, we actively monitor the clinical, regulatory and financial operating results of our tenants, and work to identify opportunities within their operations and markets that could improve their operating results at our facilities. We communicate such observations to our tenants; however, we have no contractual obligation to do so. 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 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 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 COVID-19 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, 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 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 20 Table of Contents 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. • The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) - Under the CARES Act, a substantial amount of our tenants have received, or are expected to receive, assistance from a $100 billion fund provided for eligible health care providers, which includes operators of SNFs. 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 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. See Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q for more information regarding the risks we face as result of the COVID-19 pandemic. Sale of Real Estate On February 14, 2020, we closed on the sale of six skilled nursing facilities formerly operated by affiliates of Metron Integrated Health Systems (“Metron”) . 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 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 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. 21 Table of Contents Results of Operations Operating Results Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019: Three Months Ended June 30, Increase (Decrease) Percentage Difference 2020 2019 (dollars in thousands) Revenues: Rental income $ 42,507 $ 44,123 $ (1,616) (4) % Independent living facilities 615 887 (272) (31) % Interest and other income 1,046 1,191 (145) (12) % Expenses: Depreciation and amortization 13,239 13,437 (198) (1) % Interest expense 5,849 7,285 (1,436) (20) % Property taxes 837 456 381 84 % Independent living facilities 546 719 (173) (24) % 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 . 22 Table of Contents Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019: Six Months Ended June 30, Increase (Decrease) Percentage Difference 2020 2019 (dollars in thousands) Revenues: Rental income $ 84,971 $ 82,470 $ 2,501 3 % Independent living facilities 1,240 1,747 (507) (29) % Interest and other income 2,297 1,642 655 40 % Expenses: 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 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 $0.7 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 $1.1 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 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 23 Table of Contents dividends to common stockholders from cash flow from operating activities. All such dividends are at the discretion of our board of directors. 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 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. 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. government agencies, including through Fannie Mae and the U.S. Department of Housing and Urban Development, in appropriate circumstances in connection with acquisitions and refinancing of existing mortgage loans. We have filed an automatic shelf registration statement with the U.S. Securities and Exchange Commission that expires in March 2023, which will allow us or certain of our subsidiaries, as applicable, to offer and sell shares of common stock, preferred stock, warrants, rights, units and debt securities through underwriters, dealers or agents or directly to purchasers, in one or more offerings on a continuous or delayed basis, in amounts, at prices and on terms we determine at the time of the offering. Although we are subject to restrictions on our ability to incur indebtedness, we expect that we will be able to refinance existing indebtedness or incur additional indebtedness for acquisitions or other purposes, if needed. However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing common stock or other debt or equity securities, on terms that are acceptable to us or at all. Cash Flows The following table presents selected data from our condensed consolidated statements of cash flows for the periods presented (dollars in thousands): For the Six Months Ended June 30, 2020 2019 Net cash provided by operating activities $ 67,942 $ 61,738 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 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 Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 24 Table of Contents 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. Indebtedness 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. The Notes were issued at par, resulting in gross proceeds of $300.0 million and net proceeds of approximately $294.0 million after deducting underwriting fees and other offering expenses. The Notes mature on June 1, 2025 and bear interest at a rate of 5.25% per year. Interest on the Notes is payable on June 1 and December 1 of each year, beginning on December 1, 2017. 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. 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. 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 . 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. 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 25 Table of Contents “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 such as limiting the ability of CareTrust REIT and its restricted subsidiaries to: incur or guarantee additional indebtedness; incur or guarantee secured indebtedness; make certain investments or other restricted payments; sell assets; enter into transactions with affiliates; 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. 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. The indenture also requires CareTrust REIT and its restricted subsidiaries to maintain a specified ratio of unencumbered assets to unsecured indebtedness. These covenants are subject to a number of important and significant limitations, qualifications and exceptions. The indenture also contains customary events of default. As of June 30, 2020, we were in compliance with all applicable financial covenants under the indenture. Unsecured Revolving Credit Facility and Term Loan On August 5, 2015, the Company, CareTrust GP, LLC, the Operating Partnership, as the borrower, and certain of its wholly owned subsidiaries entered into a credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender, and the lenders party thereto (the “Prior Credit Agreement”). As later amended on February 1, 2016, the Prior Credit Agreement provided the following: (i) a $400.0 million unsecured asset based revolving credit facility (the “Prior Revolving Facility”), (ii) a $100.0 million non-amortizing unsecured term loan (the “Prior Term Loan” and, together with the Prior Revolving Facility, the “Prior Credit Facility”), and (iii) a $250.0 million uncommitted incremental facility. The Prior Revolving Facility was scheduled to mature on August 5, 2019, subject to two, six-month extension options. The Prior Term Loan was scheduled to mature on February 1, 2023, and could be prepaid at any time subject to a 2% premium in the first year after issuance and a 1% premium in the second year after issuance. On February 8, 2019, the Operating Partnership, as the borrower, the Company, as guarantor, CareTrust GP, LLC, and certain of the Operating Partnership’s wholly owned subsidiaries entered into an amended and restated credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender, and the lenders party thereto (the “Amended Credit Agreement”). 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) 26 Table of Contents 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. The proceeds of the Term Loan were used, in part, to repay in full all outstanding borrowings under the Prior Term Loan and Prior Revolving Facility under the Prior Credit Agreement. Future borrowings under the Amended Credit Facility will be used for working capital purposes, for capital expenditures, to fund acquisitions and for general corporate purposes. The interest rates applicable to loans under the Revolving Facility are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.10% to 0.55% per annum or LIBOR plus a margin ranging from 1.10% to 1.55% per annum based on the debt to asset value ratio of the Company and its consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if the Company obtains certain specified investment grade ratings on its senior long-term unsecured debt). The interest rates applicable to loans under the Term Loan are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.50% to 1.20% per annum or LIBOR plus a margin ranging from 1.50% to 2.20% per annum based on the debt to asset value ratio of the Company and its consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if the Company obtains certain specified investment grade ratings on its senior long-term unsecured debt). 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 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. The Term Loan has a maturity date of February 8, 2026. The Amended Credit Facility is guaranteed, jointly and severally, by the Company and its wholly-owned subsidiaries that are party to the Amended Credit Agreement (other than the Operating Partnership). The Amended Credit Agreement contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, amend organizational documents and pay certain dividends and other restricted payments. The Amended Credit Agreement requires the Company to comply with financial maintenance covenants to be tested quarterly, consisting of a maximum debt to asset value ratio, a minimum fixed charge coverage ratio, a minimum tangible net worth, a maximum cash distributions to operating income ratio, a maximum secured debt to asset value ratio, a maximum secured recourse debt to asset value ratio, a maximum unsecured debt to unencumbered properties asset value ratio, a minimum unsecured interest coverage ratio and a minimum rent coverage ratio. 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 June 30, 2020, we were in compliance with all applicable financial covenants under the Amended Credit Agreement. 27 Table of Contents Obligations and Commitments The following table summarizes our contractual obligations and commitments as of June 30, 2020 (in thousands): Payments Due by Period Total Less than 1 Year 1 Year to Less than 3 Years 3 Years to Less than 5 Years More than 5 years Senior unsecured notes payable (1) $ 378,750 $ 15,750 $ 31,500 $ 331,500 $ — Senior unsecured term loan (2) 219,180 3,424 6,830 6,839 202,087 Unsecured revolving credit facility (3) 2,386 916 1,470 — — Operating leases 3,921 258 443 104 3,116 Total $ 604,237 $ 20,348 $ 40,243 $ 338,443 $ 205,203 (1) Amounts include interest payments o f $ 78 . 8 million . (2) Amounts include interest payments o f $ 19 . 2 million. (3) Amounts include payments related to the credit facility fee. Capital Expenditures 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 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 Our condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q have been prepared in accordance with GAAP for interim financial information set forth in the Accounting Standards Codification, as published by the Financial Accounting Standards Board. GAAP requires us to make estimates and assumptions regarding future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base these estimates on our experience and assumptions we believe to be reasonable under the circumstances. However, if our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, we may have applied a different accounting treatment, resulting in a different presentation of our financial statements. We periodically reevaluate our estimates and assumptions, and in the event they prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. 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 six months ended June 30, 2020.