What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 127 added, 89 removed, 199 unchanged (52% of the section changed)

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

As of 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 .

As of September 30, 2020, we 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 states with the highest concentration of properties by rental revenues located in California, Texas, Louisiana, Idaho and Arizona.

As of September 30, 2020, we had 85 facilities leased to The Ensign Group, Inc.

(“Ensign”), which had a total of 8,883 operational beds and units and are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington, and our 129 remaining leased properties had a total of 12,896 operational beds and units and are located in Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Louisiana, Maryland, Michigan, Minnesota, Montana, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oregon, South Dakota, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin.

As of September 30, 2020, we also owned and operated one independent living facility (“ILF”), which had a total of 168 units and was located in Texas.

We sold this ILF subsequent to September 30, 2020.

See Note 12, Subsequent Events , for further detail.

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

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

reporting and internal decision-making purposes.

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

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

We expect to grow our portfolio by pursuing opportunities to acquire

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

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

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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.

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 since 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 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.

Tenants of our properties operating pursuant to triple-net master leases, as well as the single ILF that we owned and operated as of September 30, 2020, 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.

To assist our tenants, we ordered approximately $1.2 million in personal protective equipment from March 27, 2020 t o September 30, 2020, which has been fully reimbursed as of November 5, 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.

At a portfolio wide level, 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”) continued to decline during the three months ended September 30, 2020 compared to occupancy levels in the second quarter of 2020, and may continue to decline primarily due to, among other things, (i) state mandated temporary suspensions on new admissions during COVID-19 outbreaks, (ii) with respect to our SNFs, governmental restrictions that required the temporary deferral of elective surgeries in referring hospitals, (iii) with respect to our SNFs, the imposition of strict visitation policies that may deter new patients, and (iv) 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.

Beginning in early 2020, 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;

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

The higher o perating costs affecting our tenants, and, for some of our SNFs and senior housing facilities, the impact of lower occupancy levels, 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 deferrals shortly after the pandemic was declared;

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

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

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

Approximatel y 9 8.7 % of our contractual

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

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

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

One senior housing tenant

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

W hile 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 98.7% of our contractual rent obligations due for October 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, our last outstanding mortgage loan receivable was repaid in the third quarter of 2020 .

The following relief progra ms enacted by the government have provided and we expect will continue 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.

• 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 relief fund (such funds, the “Provider Relief Funds”) 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.

On October 22, 2020, Health Resources and Services Administration (“HRSA”) released a public notice, supporting the July 20, 2020 notice, informing relief recipients of the timing of future reporting requirements for those recipients that accepted one or more payments exceeding $10,000 in the aggregate.

Recipients of relief funds will be required to report their use of funds by submitting healthcare related expenses attributable to COVID-19 that another source has not reimbursed and lost revenues, up to the amount of difference between their 2019 and 2020 actual patient care revenue.

Recipients will have until June 30, 2021 to expend relief funds.

Any funds received in excess of expenses attributable to COVID-19 and the recipient’s lost revenue, measured as a negative change in year-over-year actual revenue from patient care related sources, will be required to be returned.

The estimated federal and state COVID-19-related relief approved, received and retained to date by our operators, as reported by our operators, is $115.0 million.

At September 30, 2020, two of our operators who have received COVID-19 relief have disclosed that they have returned, or plan to return, Provider Relief Funds issued to them.

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 new testing mandate has resulted in higher operating costs when 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 resurgences of COVID-19 that may continue to occur, 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

Sales 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”) .

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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.

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%.

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

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

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.

From January 1, 2020 through November 5, 2020 , we acquired three skilled nursing facilities and one assisted living facility for approximately $42.2 million, which includes capitalized acquisition costs.

These acquisitions are expected to generate initial annual cash revenues of approximately $3.8 million and an initial blended yield of approximately 9.0%.

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Operating Results

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

Three Months Ended June 30, Increase

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

Three Months Ended September 30, Increase

(Decrease) Percentage

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Independent living facilities 568 806 (238) (30) %

Impairment of real estate investments — 16,692 (16,692) (100) %

Provision for loan losses — 1,076 (1,076) (100) %

General and administrative 4,105 3,502 603 17 %

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 .

Other income:

Gain on sale of real estate — 217 (217) (100) %

Rental income .

The $13.5 million, or 43%, increase in rental income is primarily due to a $12.1 million adjustment for collectibility of rental income during the three months ended September 30, 2019, a $1.6 million increase in rental income from real estate investments made after July 1, 2019, $1.1 million of lease termination revenue, $1.0 million from the recovery of previously reversed rent, $0.7 million from increases in rental rates for our existing tenants and $0.1 million increase from replacing existing tenants during the prior year, partially offset by a $1.7 million decrease in cash rents due to lease amendments and a $1.4 million decrease in rental income due to the disposal of assets in September 2019 and February 2020.

Independent living facilities.

The $0.3 million, or 32%, 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 during the fourth quarter ended December 31, 2019, partially offset by an increase in occupancy at our remaining ILF, Lakeland Hills Independent Living.

The $0.2 million, or 30%, decrease in expenses was primarily for the same reasons indicated for the decrease in revenues.

We sold our last remaining owned and operated ILF subsequent to September 30, 2020.

See Note 12, Subsequent Events , for further detail.

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.

The $0.8 million, or 98%, decrease in interest and other income was primarily due to the repayment of mortgage loans receivable by Covenant Care in August 2019, Providence Group in December 2019, Manteca in

May 2020 and CommuniCare Family of Companies (“CommuniCare”) in May 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.

The $0.3 million, or 2%, decrease 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 expense.

The $1.5 million, or 22%, 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 September 30, 2020 compared to the three months ended September 30, 2019.

Property taxes.

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

General and administrative expe nse.

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

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

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

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

Six Months Ended June 30, Increase

The $0.2 million, or 16%, decrease was primarily due to the disposal of assets, partially offset by changes in operators that do not make direct tax payments.

Impairment of real estate investments .

On September 1, 2019, we sold three of the seven skilled nursing properties in Ohio operated by Trillium Healthcare Group, LLC (“Trillium”) for a purchase price of $28.0 million.

Prior to the disposition, we recorded an impairment expense of approximately $7.8 million during the three months ended September 30, 2019.

Additionally, during the three months ended September 30, 2019, we met the criteria to classify six skilled nursing facilities then operated by 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.

There was no impairment of real estate investments during the three months ended September 30, 2020.

Provision for loan losses.

During the three months ended September 30, 2019, we determined the remaining contractual obligations under the bridge loan agreement to Priority Life Care, LLC (“Priority”) were not collectible and recorded a $1.1 million provision for loan losses.

There was no provision for loan losses during the three months ended September 30, 2020.

General and administrative expense.

The $0.6 million, or 17%, increase was primarily related to higher cash wages of $0.6 million compared to the prior period.

Gain on sale of real estate .

During the three months ended September 30, 2019, we recorded a $0.2 million gain on sale of real estate related to the sale of three skilled nursing properties.

There was no gain on sale of real estate during the three months ended September 30, 2020.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019:

Nine Months Ended September 30, Increase

(Decrease) Percentage

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Independent living facilities 1,660 2,232 (572) (26) %

Impairment of real estate investments — 16,692 (16,692) (100) %

Provision for loan losses — 1,076 (1,076) (100) %

General and administrative 12,921 11,418 1,503 13 %

Other (loss) income:

(Loss) gain on sale of real estate (56) 217 (273) (126) %

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.

The $16.0 million, or 14%, increase in rental income is primarily due to a $12.1 million adjustment for collectibility of rental income during the nine months ended September 30, 2019, $11.4 million in rental income from real estate investments made after January 1, 2019, $1.1 million of lease termination revenue, $1.0 million from recovery of

previously reversed rent, $0.9 million from increases in rental rates for our existing tenants and a $0.4 million increase in tenant reimbursements, partially offset by a $5.3 million decrease in cash rents due to lease amendments, a $5.1 million decrease in rental income due to the disposal of assets in September 2019 and February 2020 and a $0.5 million decrease from replacing existing tenants during the prior year.

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 $0.8 million, or 30%, 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 during the fourth quarter ended December 31, 2019, partially offset by an increase in occupancy at our remaining ILF, Lakeland Hills Independent Living.

The $0.6 million, or 26%, decrease in expenses was primarily for the same reasons indicated for the decrease in revenues.

We sold our last remaining owned and operated ILF subsequent to September 30, 2020.

See Note 12, Subsequent Events , for further detail.

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.

The $0.1 million, or 6%, decrease in interest and other income was primarily due to the repayment of mortgage loans receivable by Covenant Care in August 2019, Providence Group in December 2019, Manteca in May 2020 and CommuniCare in May 2020, slightly offset by interest income related to our mortgage loans receivable that we provided to Manteca in July 2019, CommuniCare in September 2019 and Cascade in February 2020.

See Note 4, Other Real Estate Investments, Net.

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The $0.7 million, or 2%, 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.

Interest expense.

The $3.1 million, or 15%, decrease in interest expense was primarily due to lower weighted average interest rates and a lower weighted average debt balance for the nine months ended September 30, 2020 compared to the nine months ended September 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 $0.1 million, or 6%, decrease was primarily due to the disposal of assets, partially offset by changes in operators that do not make direct tax payments.

Impairment of real estate investments.

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

Prior to the disposition, we recorded an impairment expense of approximately $7.8 million during the nine months ended September 30, 2019.

Additionally, during the nine months ended September 30, 2019, we met the criteria to classify six skilled nursing facilities then operated by 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.

There was no impairment of real estate investments during the nine months ended September 30, 2020.

Provision for loan losses.

During the nine months ended September 30, 2019, we determined the remaining contractual obligations under the bridge loan agreement to Priority were not collectible and recorded a $1.1 million provision for loan losses.

There was no provision for loan losses during the nine months ended September 30, 2020.

General and administrative expense.

The $1.5 million, or 13%, increase was primarily related to higher cash wages of $1.7 million and an increase of $0.3 million in state franchise tax, partially offset by a decrease of $0.3 million related to stock-based compensation and $0.2 million related to other corporate expenses.

(Loss) gain on sale of real estate .

During the nine months ended September 30, 2020, we recorded a $0.1 million loss on sale of real estate related to the sale of six skilled nursing facilities.

During the nine months ended September 30, 2019, we recorded a $0.2 million gain on sale of real estate related to the sale of three skilled nursing facilities.

Liquidity and Capital Resources

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

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

dividends to common stockholders from cash flow from operating activities.

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

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

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

As of September 30, 2020, we had cash and cash equivalen ts of $19.1 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.

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 nine months ended September 30, 2020 .

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

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

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

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Net cash provided by operating activities $ 108,385 $ 95,158

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Cash and cash equivalents, end of period $ 19,101 $ 5,749

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

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

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

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

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

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

5 million in payments of deferred financing costs.

Net cash provided by operating activities increased $13.2 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to an increase of rental income due to acquisitions, increase in rental rates for existing tenants subsequent to September 30, 2019 and decrease in interest paid on outstanding indebtedness due to lower weighted average interest rates and a lower weighted average debt balance.

Cash provided by investing activities for the nine months ended September 30, 2020 was primarily comprised of $83.2 million of payments received from preferred equity investments and mortgage and other loans receivable and $2.2 million in net proceeds from real estate sales, partially offset by $57.0 million in acquisitions of real estate and investments in real estate mortgage loans and $6.3 million of improvement in real estate and purchases of furniture, fixtures and equipment.

C ash used in investing activities for the nine months ended September 30, 2019 was primarily comprised of $ 336.2 million in acquisitions of real estate and investments in real estate mortgage loans and $4.2 million of improvement in real estate and

purchases of furniture, fixtures and equipment partially offset by $14.2 million of payments received from preferred equity investments and mortgage and other loans receivable and $0.2 million in net proceeds from real estate sales.

Our cash flows used in financing activities for the nine months ended September 30, 2020 were primarily comprised of $69.3 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 (as defined below).

Our cash flows provided by financing activities for the nine months ended September 30, 2019 were primarily comprised of $ 70 .0 million in net borrowings under our Amended Credit Facility and Prior Credit Facility (as defined below) 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 $ 59.2 million in dividends paid, $4.

5 million in payments of deferred financing costs and a $2.5 million net settlement adjustment on restricted stock.

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

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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 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.

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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

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

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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.

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.

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(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;

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

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

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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.

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

Unsecured Revolving Credit Facility and Term Loan

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

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.

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

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

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

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

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

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

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

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

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

Obligations and Commitments

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

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

Payments Due by Period

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Total $ 602,699 $ 20,279 $ 39,817 $ 338,300 $ 204,303

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

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

(1) Amounts include interest payments of $78.8 million.

(2) Amounts include interest payments of $17.9 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.

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 The Pennant Group, Inc., 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.

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

Critical Accounting Policies and Estimates

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

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

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis