What changed in this filing

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Item 1. Financial Statements

2020-11-05 compared with 2020-08-06 · 187 added, 136 removed, 387 unchanged (45% of the section changed)

3 unchanged sentences

(in thousands, except share and per share amounts)

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Real estate investments, net $ 1,423,238 $ 1,414,200

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Preferred stock, $ 0.01 par value;

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

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

Common stock, $ 0.01 par value;

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

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

Additional paid-in capital 1,163,418 1,162,990

4 unchanged sentences

CARETRUST REIT, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

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

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

7 unchanged sentences

Independent living facilities 568 806 1,660 2,232

Impairment of real estate investments — 16,692 — 16,692

Provision for loan losses — 1,076 — 1,076

General and administrative 4,105 3,502 12,921 11,418

Total expenses 24,135 43,585 74,327 93,693

Loss on sale of real estate — — ( 56 ) —

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

Earnings per common share:

Other income (loss):

Gain (loss) on sale of real estate — 217 ( 56 ) 217

Net income (loss) $ 21,552 $ ( 10,054 ) $ 59,812 $ 25,697

Earnings (loss) per common share:

Basic $ 0.23 $ ( 0.11 ) $ 0.63 $ 0.28

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

Amortization of stock-based compensation — — 972 — 972

Common dividends ($ 0.25 per share)

— — — ( 23,934 ) ( 23,934 )

Net income — — — 21,552 21,552

Balance at September 30, 2020 95,214,080 $ 952 $ 1,163,418 $ ( 248,334 ) $ 916,036

See accompanying notes to condensed consolidated financial statements.

21 unchanged sentences

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

Issuance of common stock, net — — ( 78 ) — ( 78 )

Vesting of restricted common stock, net of shares withheld for employee taxes 30,047 — — — —

Amortization of stock-based compensation — — 981 — 981

Common dividends ($ 0.225 per share)

— — — ( 21,500 ) ( 21,500 )

Net loss — — — ( 10,054 ) ( 10,054 )

Balance at September 30, 2019 95,103,270 $ 951 $ 1,162,047 $ ( 235,512 ) $ 927,486

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(in thousands)

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Cash flows from operating activities:

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Straight-line rental income ( 65 ) ( 1,483 )

Adjustment for collectibility of rental income — 12,078

Noncash interest income — ( 31 )

Loss on sale of real estate 56 —

Loss (gain) on sale of real estate 56 ( 217 )

Interest income distribution from other real estate investment 1,346 463

Impairment of real estate investments — 16,692

Provision for loan losses — 1,076

Change in operating assets and liabilities:

10 unchanged sentences

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

Escrow deposits for potential acquisitions of real estate ( 1,000 ) ( 22,920 )

Net proceeds from sales of real estate 2,189 218

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Increase in pre-acquisition costs payable $ — $ 137

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

Sale of real estate settled with notes receivable $ 32,400 $ 27,500

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

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

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

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

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

As of September 30, 2020, the Company owned and leased to independent operators, 214 skilled nursing, multi-service campuses, assisted living and independent living facilities consisting of 21,779 operational beds and units located in 28 st ates with the highest concentration of properties by rental revenues located in California, Texas, Louisiana, Idaho and Arizona.

As of September 30, 2020, the Company also owned and operated one independent living facility which had a total of 168 units located in Texas.

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.

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

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

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

In early 2020, the COVID-19 outbreak 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 been lifted or scaled back, ongoing resurgences of COVID-19 have resulted in the reimposition of certain restrictions and may lead to other restrictions being reimplemented in response to efforts to reduce the spread of COVID-19.

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

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

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

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All intercompany transactions and account balances within the Company have been eliminated.

Lessor Accounting —In accordance with Accounting Standards Codification (“ASC”) 842, Leases , the Company generally recognizes lease revenue on a straight-line basis of accounting.

Lessor Accounting —The Company recognizes lease revenue in accordance with Accounting Standards Codification (“ASC”) 842, Leases.

The Company’s lease agreements typically contain annual escalators based on the percentage change in the Consumer Price Index which are accounted for as variable lease payments in the period in which the change occurs.

For lease agreements that contain fixed rent escalators, the Company generally recognizes lease revenue on a straight-line basis of accounting.

The Company generates 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.

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

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

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

The Company recognized, on a gross basis, property taxes of $ 0.9 million and $ 2.5 million for the three and nine months ended September 30, 2020, respectively.

The Company recognized, on a gross basis, property taxes of $ 0.8 million and $ 2.1 million for the three and nine months ended September 30, 2019, respectively.

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

The Company considers the operator’s performance and anticipated trends, payment history, and the existence and creditworthiness of guarantees, among other factors, in making this determination.

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

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

For such leases that are deemed probable of collection, revenue continues to be

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

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

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

recorded on a straight-line basis over the lease term, if applicable.

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

Such write-offs are recorded as increases or decreases through rental income on the Company’s condensed consolidated statements of operations.

For the three and nine months ended September 30, 2020, the Company recorded recovery adjustments of $ 1.0 million and did no t recognize any write-off adjustments to rental income.

For the three and nine months ended September 30, 2019, the Company recorded $ 12.1 million of write-off adjustments to rental income related to rental income recognized in prior periods.

See Note 3, Real Estate Investments, Net for further detail.

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

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

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

The Company’s ability to accurately estimate future cash flows and estimate and allocate fair values impacts the timing and recognition of impairments.

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

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

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

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

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

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

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

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

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

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

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

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

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

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

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The Company adopted ASU 2016-13 on January 1, 2020.

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

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

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

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

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

As of September 30, 2020, the Company had no remaining instruments for which the fair value option had been elected.

In August 2018, the FASB issued ASU No.

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

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

All other amendmen ts should be applied retrospectively to all periods presented upon their effective date.

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.

All other amendments should be applied retrospectively to all periods presented upon their effective date.

The Company adopted ASU 2018-13 on January 1, 2020.

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

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

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

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

2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), that provides optional relief to applying reference rate reform to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”), which will be discontinued by the end of 2021.

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

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

The Company is still evaluating the impact of ASU 2020-04 and expects to take full advantage of the offered optional expedients and exceptions, but does not expect the adoption of the standard to have a material impact on the Company’s consolidated financial statements.

REAL ESTATE INVESTMENTS, NET

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

June 30, 2020 December 31, 2019

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

September 30, 2020 December 31, 2019

Land $ 209,280 $ 204,154

5 unchanged sentences

Real estate investments, net $ 1,423,238 $ 1,414,200

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

As of September 30, 2020 , 214 of the Company’s facilities wer e leased to various operators under triple-net leases.

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

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

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

2020 (six months) $ 84,161

As of September 30, 2020, the Company had one independent living facility that the Company owned and operated.

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

2020 (three months) $ 42,533

Thereafter 973,638

Total $ 1,866,884

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

The following table summarizes components of the Company’s rental revenue (dollars in thousands):

For the Three Months Ended September 30, For the Nine Months Ended September 30,

Rental Income 2020 2019 2020 2019

Contractual rent due (1)

$ 42,866 $ 43,109 $ 127,789 $ 124,642

Straight-line rent 17 546 65 1,483

Adjustment for collectibility (2)

— ( 12,078 ) — ( 12,078 )

Recovery of previously reversed rent (3)

1,047 — 1,047 —

Lease termination revenue (4)

1,106 — 1,106 —

Total $ 45,036 $ 31,577 $ 130,007 $ 114,047

(1) Includes initial cash rent and tenant operating expense reimbursements, as adjusted for applicable rental escalators and rent increases due to capital expenditures funded by the Company.

For tenants on a cash basis, this represents the lesser of the amount that would be recognized on a straight-line basis or cash that has been received.

(2) During the three and nine months ended September 30, 2019, and in accordance with ASC 842, the Company evaluated the collectibility of lease payments through maturity and determined that it was not probable that the Company would collect substantially all of the contractual obligations from five operators through maturity.

As such, the Company reversed $ 7.8 million of contractual rent, $ 3.5 million of straight-line rent and $ 0.8 million of property taxes during the three and nine months ended September 30, 2019.

If lease payments are subsequently deemed probable of collection, the Company increases rental income for such recoveries.

(3) During the three and nine months ended September 30, 2020, the Company recovered $ 1.0 million in rental revenue related to one operator that was previously written off.

(4) During the three and nine months ended September 30, 2020, in connection with the agreement to terminate its lease agreements with affiliates of Metron Integrated Health Systems (“Metron”) and to sell the facilities to a third-party, the Company received $ 1.1 million from Metron affiliates.

Recent Real Estate Acquisitions

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

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

Type of Property Purchase Price (1)

1 unchanged sentence

Skilled nursing $ 34,845 $ 3,219 3 249

Multi-service campuses — — — —

Assisted living 7,396 590 1 62

2 unchanged sentences

(2) The number of beds/units includes operating beds at acquisition date.

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

Sale of Real Estate

On February 14, 2020, the Company closed on the sale of six skilled nursing facilities formerly operated by affiliates of Metron Integrated Health Systems (“Metron”).

On February 14, 2020, the Company closed on the sale of six skilled nursing facilities formerly operated by affiliates of Metron.

In connection with the sale for $ 36.0 million, the Company 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.

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

Lease Amendments

On July 15, 2019, the Company terminated its then existing master lease (the “Original Trillium Lease”) with affiliates of Trillium Healthcare Group, LLC (“Trillium”), which covered ten properties in Iowa, seven properties in Ohio and one property in Georgia.

On August 16, 2019, the Company entered into a new master lease (the “New Trillium Lease”) with Trillium’s Iowa and Georgia affiliates covering the ten properties in Iowa and the one property in Georgia.

The Company recorded an adjustment to reduce rental income for accounts and other receivables by approximately $ 3.8 million in the three months ended September 30, 2019.

On September 1, 2019, four of the seven skilled nursing properties in Ohio operated by Trillium under the Original Trillium Lease were transferred to affiliates of Providence Group, Inc.

(“Providence”).

In connection with the transfer, the Company amended its triple-net master lease with Providence.

The amended lease had a remaining initial term of approximately 13 years as of September 1, 2019, and includes two five-year renewal options and CPI-based rent escalators.

Annual cash rent under the amended lease with Providence increased by approximately $ 2.1 million.

Impairment of Real Estate Investments and Assets Held for Sale

On September 1, 2019, the Company sold three of the seven skilled nursing properties in Ohio operated by Trillium under the Original Trillium Lease for a purchase price of $ 28.0 million.

During the three months ended September 30, 2019 and prior to the disposition, the Company recorded an impairment expense of approximately $ 7.8 million.

In connection with the sale, the Company provided affiliates of CommuniCare Family of Companies (“CommuniCare”), the purchaser of the three Ohio properties, with a mortgage loan secured by the three Ohio properties for approximately $ 26.5 million.

See Note 4, Other Real Estate Investments, Net, for additional information.

As of September 30, 2019, the Company met the criteria to classify six skilled nursing facilities operated by affiliates of Metron as held for sale, which resulted in an impairment expense of approximately $ 8.8 million to reduce the carrying value to fair value less costs to sell the facilities.

The assets held for sale as of December 31, 2019 of $ 34.6 million were primarily comprised of real estate assets.

The fair value of the assets impaired during the three months ended September 30, 2019 was based on contractual sales prices, which are considered to be Level 2 measurements within the fair value hierarchy.

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

OTHER REAL ESTATE INVESTMENTS, NET

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

The Company paid $ 15.0 million after receiving back its initial investment of $ 2.3 million and cumulative contractual preferred return through January 17, 2020, the acquisition date, of $ 1.4 million, of which less than $ 0.1 million was recognized as interest income during the six months ended June 30, 2020.

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

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

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

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

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

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

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

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

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

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

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

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

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

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

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

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

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

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

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

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

See Note 12, Subsequent Events , for further detail.

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

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

During the three months ended September 30, 2020, prepayment for the mortgage loan of $ 13.9 million and accrued interest was received in full by the Company.

As of September 30, 2020, the Company had no remaining mortgage loan receivables.

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

During the three and nine months ended September 30, 2019, the Company recognized $ 0.8 million and $ 1.8 million , respectively, of interest income related to its mortgage loans.

During the three and nine months ended September 30, 2020, the Company recognized $ 17,000 and $ 0.2 million, respectively, of interest income related to its other loans receivable.

During the three and nine months ended September 30, 2019, the Company recognized $ 29,000 and $ 0.1 million, respectively, of interest income related to its other loans receivable.

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

FAIR VALUE MEASUREMENTS

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Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

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

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

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

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

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

Items Measured at Fair Value on a Recurring Basis

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

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

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

Mortgage loan receivable :

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

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

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

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

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

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

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

Items Measured at Fair Value on a Non-Recurring Basis

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

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

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

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

For the three and nine months ended September 30, 2019, the Company recorded an impairment expense of $ 16.7 million.

See Note 3, Real Estate Investments, Net, for additional information.

Items Disclosed at Fair Value

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

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

June 30, 2020 December 31, 2019

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

September 30, 2020 December 31, 2019

Value Carrying

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Mortgage loans receivable 3 $ — $ — $ — $ 29,500 $ 29,500 $ 29,500

3 $ — $ — $ — $ 29,500 $ 29,500 $ 29,500

Financial liabilities:

Senior unsecured notes payable 2 $ 300,000 $ 296,479 $ 309,000 $ 300,000 $ 295,911 $ 312,750

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

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

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

These balances approximate their fair values due to the short-term nature of these instruments.

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

Unsecured revolving credit facility and senior unsecured term loan:

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

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

June 30, 2020 December 31, 2019

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

September 30, 2020 December 31, 2019

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

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

As of September 30, 2020, the Issuers have not elected to redeem any of the Notes.

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

The obligations under the Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by the Company and certain of the Company’s wholly owned existing and, subject to certain exceptions, future material

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

subsidiaries (other than the Issuers);

provided, however, that such guarantees are subject to automatic release under certain customary circumstances.

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The indenture also contains customary events of default.

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

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

Unsecured Revolving Credit Facility and Term Loan

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(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 Revolving Facility was scheduled to mature on August 5, 2019, subject to two six-

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

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.

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

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

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

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

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

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

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

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

For the Six Months Ended

June 30, 2019

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

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

For the Nine Months Ended

September 30, 2019

Number of shares 2,459

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Gross proceeds* $ 47,893

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

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

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

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

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

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

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

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

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

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

For the Three Months Ended

March 31, 2020 June 30, 2020

March 31, 2020 June 30, 2020 September 30, 2020

Dividends declared per share $ 0.25 $ 0.25 $ 0.25

Dividends payment date April 15, 2020 July 15, 2020

Dividends payment date April 15, 2020 July 15, 2020 October 15, 2020

Dividends payable as of record date $ 23,931 $ 23,931 $ 23,934

Dividends record date March 31, 2020 June 30, 2020

Dividends record date March 31, 2020 June 30, 2020 September 30, 2020

STOCK-BASED COMPENSATION

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The Plan provides for the granting of stock-based compensation, including stock options, restricted stock, performance awards, restricted stock units and other incentive awards to officers, employees and directors in connection with their employment with or services provided to the Company.

Restricted Stock Awards — 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”), employees of Ensign who had unvested shares of restricted stock were given one share of CareTrust REIT unvested restricted stock totaling 207,580 shares at the Spin-Off.

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

Restricted Stock Awards — In connection with the separation of the healthcare business and real estate business of The Ensign Group, Inc.

(“Ensign”) into two separate and independently publicly traded companies (the “Spin-Off”), employees of Ensign who had unvested shares of restricted stock were given one share of CareTrust REIT unvested restricted stock totaling 207,580 shares at the Spin-Off.

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

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

As of September 30, 2020, there were 1,760 unvested restricted stock awards outstanding that were issued in connection with the Spin-Off.

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

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

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

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

Stock-based compensation expense $ 972 $ 981 $ 2,819 $ 3,122

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

As of September 30, 2020, there was $ 6.5 million of unamortized stock-based compensation expense related to unvested awards and the weighted-average remaining vesting period of such awards was 2.5 years.

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

EARNINGS PER COMMON SHARE

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

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

EARNINGS (LOSS) PER COMMON SHARE

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

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

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

Net income (loss) $ 21,552 $ ( 10,054 ) $ 59,812 $ 25,697

Net income allocated to participating securities ( 75 ) ( 66 ) ( 224 ) ( 231 )

Numerator for basic and diluted earnings available to common stockholders $ 18,860 $ 19,619 $ 38,112 $ 35,586

Numerator for basic and diluted earnings (loss) available to common stockholders $ 21,477 $ ( 10,120 ) $ 59,588 $ 25,466

Weighted-average basic common shares outstanding 95,214 95,103 95,195 92,409

Weighted-average diluted common shares outstanding 95,214 95,103 95,195 92,409

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

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

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

Earnings (loss) per common share, basic $ 0.23 $ ( 0.11 ) $ 0.63 $ 0.28

Earnings (loss) per common share, diluted $ 0.23 $ ( 0.11 ) $ 0.63 $ 0.28

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

COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

As of September 30, 2020, the Company had committed to fund expansions, construction and capital improvements at certain triple-net leased facilities totaling $ 14.1 million, of which $ 12.9 million is subject to rent increase at the time of funding.

CONCENTRATION OF RISK

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

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

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

Major operator concentrations – As of September 30, 2020, Ensign leased 85 skilled nursing, multi-service campuses, assisted living and independent living facilities which had a total of 8,883 beds and units and are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington.

The four states in which Ensign leases the

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

expense reimbursements.

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

highest concentration of properties by rental revenues as of September 30, 2020 are California, Texas, Arizona and Utah.

During the three and nine months ended September 30, 2020, Ensign represented 30 % and 31 %, respectively, of the Company’s rental income, exclusive of operating expense reimbursements.

During the three and nine months ended September 30, 2019 Ensign represented 50 % and 40 %, respectively, of the Company’s rental income, exclusive of operating expense reimbursements.

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

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

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

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

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

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

During both the three and nine months ended September 30, 2020, PMG represented 16 % of the Company’s rental income, exclusive of operating expense reimbursements.

During the three and nine months ended September 30, 2019 PMG represented 22 % and 15 %, respectively, of the Company’s rental income, exclusive of operating expense reimbursements.

SUBSEQUENT EVENTS

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

Mortgage Loan Receivable

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

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

On November 1, 2020, the Company closed on the sale of its remaining owned and operated ILF to a third party for a purchase price of $ 4.5 million.

The Company does not expect to record a material gain or loss in connection with the sale.

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

What changed 10-Q

Item 1. Financial Statements