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Item 7. Management’s Discussion and Analysis

2021-02-10 compared with 2020-02-20 · 202 added, 151 removed, 186 unchanged (65% of the section changed)

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Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:

Recent Transactions

• Recent Developments

• Results of Operations

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

As of December 31, 2019 , the 85 facilities leased to Ensign had a total of 8,908 beds and units and are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington and the 131 remaining leased properties had a total of 13,055 beds and units and are located in California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Louisiana, Maryland, Michigan, Minnesota, Montana, New Mexico, North Carolina, North Dakota, Ohio, Oregon, South Dakota, Texas, Virginia, Washington, West Virginia and Wisconsin.

We also own and operate one ILF which had a total of 168 units and is located in Texas.

As of December 31, 2019 , we also had other real estate investments consisting of one preferred equity investment totaling $3.8 million and two mortgage loans receivable with a carrying value of $29.5 million .

Recent Transactions

On October 1, 2019, Ensign completed its previously announced separation of its 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.

(“Pennant” and, such separation, the “Pennant Spin”).

As a result of the Pennant Spin, on October 1, 2019, we amended the master leases entered into with subsidiaries of Ensign (the “Ensign Master Leases”) to lease 85 facilities to subsidiaries of Ensign, which have a total of 8,908 operational beds, and entered into a new triple-net master lease with subsidiaries of Pennant (the “Pennant Master Lease”) to lease 11 facilities, which have a total of 1,151 operational beds.

The 85 facilities leased to subsidiaries of Ensign also include one independent living facility, formerly operated by us, that we leased to Ensign concurrently with the Pennant Spin.

The contractual initial annual cash rent under the Pennant Master Lease is approximately $7.8 million .

The Pennant Master Lease carries an initial term of 15 years , with two five-year renewal options and CPI-based rent escalators.

The contractual annual cash rent under the amended Ensign Master Leases was reduced by approximately $7.8 million.

Ensign continues to guarantee obligations under the Ensign Master Leases and the Pennant Master Lease.

If Pennant achieves a specified portfolio coverage and continuously maintains it for a specified period, Ensign’s obligations under the guaranty with respect to the Pennant Master Lease would be released.

As of December 31, 2019 , Ensign and Pennant represented 32% and 5% , respectively, of our contractual rental income, exclusive of operating expense reimbursements, on an annualized run-rate basis.

Trillium Lease Termination and New Master Lease

On July 15, 2019, we terminated our 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, we 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.

We 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 Ohio properties operated by Trillium under the Original Trillium Lease were transferred to affiliates of Providence Group, Inc.

(“Providence”).

In connection with the transfer, we amended our triple-net master lease with Providence.

The amended lease has a remaining initial term of approximately 13 years, with two five-year renewal options and CPI-based rent escalators.

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

Trio Lease Amendment

On November 4, 2019, we amended our existing master lease with affiliates of Trio Healthcare, Inc.

(“Trio”), which covered seven facilities based in Dayton, Ohio.

The amended lease has a remaining initial term of approximately 13 years, with two five-year renewal options and CPI-based rent escalators.

The annual base rent due under the amended lease with Trio is approximately $4.7 million and provides for payment of percentage rent if Trio achieves certain increases in portfolio revenue.

Impairment of Real Estate Investments, Asset Sales and Assets Held for Sale

On September 1, 2019, we sold three of the seven Ohio skilled nursing properties 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, we recorded an impairment expense of approximately $7.8 million .

In connection with the sale, we 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.

In addition, during the third quarter of 2019, we met the criteria to classify six skilled nursing facilities operated by affiliates of Metron Integrated Health Systems (“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 properties during the third quarter ended September 30, 2019.

As of December 31, 2019 , the properties continued to be held for sale and the carrying value of $34.6 million is primarily comprised of real estate assets.

In February 2020, the six skilled nursing facilities were sold.

As of December 31, 2020, CareTrust REIT’s real estate portfolio consisted of 218 skilled nursing facilities (“SNFs”), multi-service campuses and assisted living facilities (“ALFs”) consisting of 22,466 operational beds and units located in 28 states with the highest concentration of properties by rental income located in California, Texas, Louisiana, Idaho and Arizona.

As of December 31, 2020, we also had other real estate investments consisting of one mezzanine loan receivable with a carrying value of $15.0 million.

Recent Developments

The COVID-19 pandemic 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, resurgences of COVID-19 and the emergence of new variants thereof 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 and its variants.

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 operating our properties pursuant to triple-net master leases have been adversely impacted, and we expect that they 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, the costs of mandated testing and other regulatory requirements, and increased staffing costs.

To assist and protect our tenants and their residents, patients and staffs, we employed our scale and purchasing power to procure approximately $1.2 million of then-scarce personal protective equipment (“PPE”) from March 27, 2020 to December 31, 2020, and offered it to our tenants at our volume-discounted cost.

This not only enabled them to obtain critical PPE at a time when its availability was limited to smaller purchasers, it also enabled them to benefit from the cost efficiencies of our bulk order.

Tenants who received PPE from us have fully reimbursed the discounted cost thereof to us as of December 31, 2020.

At a portfolio wide level, occupancy levels at our seniors housing facilities have remained relatively stable from the onset of the COVID-19 pandemic through the third quarter of 2020, but began to decline slightly in the fourth quarter of 2020, while occupancy levels at our skilled nursing facilities (“SNFs”), which declined at the onset of the COVID-19 pandemic, continued to decline during the three months ended December 31, 2020 compared to occupancy levels in the third 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 require the temporary deferral of elective surgeries in referring hospitals, (iii) with respect to our SNFs, the imposition of strict visitation policies that may deter prospective patients from seeking admission, and (iv) with respect to our seniors 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 continued to increase during the three months ended December 31, 2020, compared to the third quarter of 2020, while overall occupancy has declined.

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 operating costs affecting our tenants, and the impact of lower occupancy levels, have 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 seniors housing tenant proposed partial rent relief, and in the fourth quarter of 2020 the five facilities operated by the tenant were transitioned to another operator with whom we had an existing landlord-tenant relationship, with all outstanding rent paid in full upon transition.

Wh ile 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 100% of our contractual rent obligations due for January 2021 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 wer e repaid during the year ended December 31, 2020, except for one mezzanine loan entered into during the fourth quarter of 2020 which is current but not yet due.

The following relief progra ms enacted by the government have provided, and we expect will continue to provide some benefits to our tenants subject to the programs’ respective 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, including some of our tenants.

• The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) - Under the CARES Act, a substantial number of our tenants have received, or are expected to receive, assistance from a relief fund in excess of $100 billion (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 March 31, 2021 of a 2% Medicare sequestration cut, and a deferral of the employer’s Social Security remittances through December 31, 2020 with a repayment period through December 31, 2021.

On December 27, 2020, the President signed a stimulus package which includes two important provisions impacting the Provider Relief Funds 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 such provider’s budgeted revenue and actual revenue if such budgeted revenue had been established and approved prior to March 27, 2020 or by comparing year-over-year rev enue.

The new stimulus package allows the parent organization to allocate all or any portion of such reimbursement among the subsidiary eligible health care providers of the parent organization.

Under the current rules, recipients of Provider Relief Funds 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, as described above, 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, i s approximately $150.8 million.

At December 31, 2 020, two of our ope rators who have received Provider Relief Funds have disclosed that they have returned, or plan to return, all or a portion of the 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 is requiring that all SNFs in states with a 5% positivity rate or greater test all SNF staff each week.

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.

In December 2020, the U.S.

Food and Drug Administration issued the first emergency use authorization for a vaccine for the prevention of COVID-19 which allows distribution in the United States, followed by a second vaccine in the same month.

The Centers for Disease Control and Prevention recommends that health care workers, long-term care workers and residents of long-term care facilities should be among the first to receive the vaccine.

As of February 10, 2021, based on information provided by operators who have reported such information to us, the majority of our operators’ residents have received the first dose of the vaccine, while less than half of such operators’ staff have been vaccinated.

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, timing of vaccine rollouts, public acceptance and usage of vaccines and the effectiveness of vaccines in limiting the spread of COVID-19 and its variants , a ctions taken to contain the spread of COVID-19, resurgences of COVID-19 and its variants 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.

Portfolio Changes

Twenty/20 Lease Termination and New Noble Master Lease

On December 1, 2020, five assisted living facilities in Virginia operated by Twenty/20 Management, Inc.

(“Twenty/20”) were transferred to affiliates of Noble Senior Services (“Noble”).

In connection with the transfer, we entered into a new triple-net master lease with Noble.

The new lease has a remaining initial term of approximately 14 years, with two five-year renewal options and CPI-based rent escalators.

Initial annual cash rent under the new lease is approximately $3.2 million.

Asset Sales and Assets Held for Sale

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

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

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

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

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

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

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

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

On November 1 , 2020, we sold our one remaining owned and operated independent living facility consisting of 168 units located in Texas with an aggregate carrying value of $4.2 million for gross proceeds of $4.5 million.

In connection with the sale, we recognized a gain of $20,000.

During the fourth quarter of 2020, we met the criteria to classify one skilled nursing facility operated by affiliates of Five Oaks as held for sale.

As of December 31, 2020, the property continued to be held for sale and the carrying value of $7.2 million is primarily comprised of real estate assets.

In February 2021, the property was sold.

See Note 13, Subsequent Events, for further detail.

During the year ended December 31, 2019, we sold one of our owned and operated independent living facilities consisting of 38 units located in Texas with an aggregate carrying value of $1.7 million for net proceeds of $3.3 million .

In connection with the sale, we recognized a gain of $1.6 million .

At-The-Market Offering of Common Stock

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 May 17, 2017, was terminated (the “Prior ATM Program”).

There was no New ATM Program activity during 2019.

The following table summarizes the Prior ATM Program activity for 2019 (shares and dollars in thousands, except per share amounts):

For the Three Months Ended

March 31, 2019

June 30, 2019

September 30, 2019

December 31, 2019

Number of shares

Average sales price per share

Gross proceeds (1)

Total gross proceeds is before $0.6 million in commissions paid to the sales agents under the Prior ATM Program during the year ended December 31, 2019.

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 New ATM Program or Prior ATM Program activity (or activity under any predecessor at-the-market equity offering programs) during 2020.

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

See Liquidity and Capital Resources for additional information.

Share Repurchase Program

On March 20, 2020, our board of directors authorized a share repurchase program to repurchase up to $150.0 million of outstanding shares of our common stock (the “Repurchase Program”).

Repurchases under the Repurchase Program, which expires on March 31, 2023, may be made through open market purchases, privately negotiated transactions, structured or derivative transactions, including accelerated share repurchase transactions, or other methods of acquiring shares, in each case subject to market conditions and at such times as shall be permitted by applicable securities laws and determined by management.

Repurchases under the Repurchase Program may also be made pursuant to a plan adopted under Rule 10b5-1 promulgated under the Exchange Act.

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

We did not repurchase any shares of common stock under the Repurchase Program during the year ended December 31, 2020.

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

Recent Investments

From January 1, 2019 through February 20, 2020 , we acquired eighteen skilled nursing facilities, four multi-service campuses and two assisted living facilities for approximately $352.8 million , which includes capitalized acquisition costs.

From January 1, 2020 through February 10, 2021, we acquired six skilled nursing facilities, one multi-service campus and one assisted living facility for approximately $89.8 million, which includes capitalized acquisition costs.

These acquisitions are expected to generate initial annual cash revenues of approximately $7.6 million and an initial blended yield of approximately 8.5%.

See Note 3, Real Estate Investments, Net, and Note 14, Subsequent Events, in the Notes to consolidated financial statements for additional information.

Public Offering of Common Stock

On April 15, 2019, we completed an underwritten public offering of 6,641,250 shares of our common stock, par value $0.01 per share, at an initial price to the public of $23.35, including 866,250 shares of common stock sold pursuant to the full exercise of an option to purchase additional shares of common stock granted to the underwriters, resulting in approximately $149.0 million in net proceeds, after deducting the underwriting discount and offering expenses.

We used the proceeds from the offering to repay a portion of the outstanding borrowings on our Revolving Facility (defined below) which had been used to fund a portion of the purchase price of acquisitions in the second quarter of 2019.

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

In November 2020, we provided Next VA Star Realty Holdings, LLC a mezzanine loan for nine skilled nursing facilities secured by membership interests in affiliates of Next VA Star Realty Holdings, LLC for approximately $15.0 million, at an annual fixed interest rate of 12%.

The loan requires monthly interest payments, is set to mature on November 30, 2025 and may (subject to certain restrictions) be prepaid before the maturity date if paid in full and for an exit fee ranging from 1% to 3% of the loan plus unpaid interest payments equal to 24 months (less the amount of monthly interest payments made by the borrower through the date of the prepayment).

Results of Operations

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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Year Ended December 31,

Year Ended December 31, Increase

(Decrease) Percentage

(dollars in thousands)

Rental income $ 173,612 $ 155,667 $ 17,945 12 %

Tenant reimbursements

Independent living facilities 2,077 3,389 (1,312) (39) %

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General and administrative 16,302 15,158 1,144 8 %

Other (loss) income:

(Loss) gain on sale of real estate (37) 1,777 (1,814) (102) %

Rental income.

Rental income was $173.6 million for the year ended December 31, 2020 compared to $155.7 million for the year ended December 31, 2019.

The $15.6 million , or 11% , increase in rental income is primarily due to $25.7 million from real estate investments made after January 1, 2018, $2.8 million from increases in rental rates for our existing tenants and $2.9 million of tenant reimbursement revenue recognized and classified as rental income due to the adoption of the new lease accounting standards updates (the “new lease ASUs”) on January 1, 2019, partially offset by an $11.8 million adjustment for collectibility of rental income, a $1.6 million decrease in rental income due to the sale of three ALFs in March 2018 and three SNFs in September 2019, a $1.5 million decrease in straight-line rent and a $1.0 million decrease in cash rents.

Tenant reimbursements and property taxes.

Tenant reimbursements decreased $11.9 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 .

Property taxes decreased $8.9 million , or 74% , for the year ended December 31, 2019 compared to the year ended December 31, 2018 .

On January 1, 2019, we adopted the new lease ASUs.

Tenant reimbursements related to property taxes and insurance are neither lease nor non-lease components under the new lease ASUs.

If a lessee makes payments for taxes and insurance directly to a third party on behalf of a lessor, lessors are required to exclude them from variable payments and from recognition in the lessors’ income statements.

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

Prior to the adoption of the new lease ASUs, we recognized tenant recoveries as tenant reimbursement revenues regardless of whether the third party was paid by the lessor or lessee.

See Note 2, Summary of Significant Accounting Policies.

During the year ended December 31, 2019 , we recognized tenant reimbursements of $2.9 million for real estate taxes which were paid by us directly to third parties and classified as rental income on our consolidated income statement.

The $17.9 million, or 12%, increase in rental income is primarily due to $12.9 million from real estate investments made after January 1, 2019, a $11.7 million reversal for collectibility of rental income during the year ended December 31, 2019, $1.8 million from increases in rental rates for our existing tenants, $1.2 million of lease termination revenue, $1.0 million from recovery of previously reversed rent, and $0.3 million increase in tenant reimbursements, partially offset by a $6.2 million decrease in rental income due to the disposal of assets in September 2019 and February 2020, a $4.4 million decrease in cash rents due to lease amendments and $0.4 million decrease from replacing existing tenants during the prior year.

Independent living facilities.

Revenues for the ILFs that we owned and operated were flat for the year ended December 31, 2019 compared to the year ended December 31, 2018 , primarily due to increased occupancy at Lakeland Hills Independent Living, partially offset by a decrease in revenue due to the sale of one ILF to a third party and the lease of one ILF to Ensign concurrently with the Pennant Spin during the fourth quarter ended December 31, 2019.

Revenues for the ILFs that we owned and operated was $2.1 million for the year ended December 31, 2020 compared to $3.4 million for the year ended December 31, 2019.

The $1.3 million, or 39%, decrease in ILF revenues is primarily due to a reduction in revenue of $1.5 million related to the sale of one ILF to a third party and the lease of a second ILF to Ensign concurrently with the Pennant Spin during the fourth quarter ended December 31, 2019, partially offset by a $0.2 million increase in revenue for our remaining ILF, due to occupancy increases, through the date of sale on November 1, 2020.

Expenses for the ILFs were $1.9 million for the year ended December 31, 2020 compared to $2.9 million for the year ended December 31, 2019.

The $0.1 million , or 2% , decrease in expenses was primarily due to the sale of one ILF to a third party and the lease of one ILF to Ensign concurrently with the Pennant Spin during the fourth quarter ended December 31, 2019.

The $1.0 million, or 36%, decrease in expenses was primarily for the same reasons indicated for the decrease in revenues.

Interest and other income.

Interest and other income increased $2.8 million for the year ended December 31, 2019 to $4.3 million compared to $1.6 million for the year ended December 31, 2018 .

The increase was primarily due to $1.3 million of interest income, including $0.6 million for unrecognized preferred return related to prior periods, due to the repayment of preferred equity investments and $1.5 million of interest income related to the mortgage loans receivable that we provided to Covenant Care in February 2019 and to CommuniCare in September 2019.

Interest and other income decreased $1.7 million, or 39%, for the year ended December 31, 2020 to $2.6 million compared to $4.3 million for the year ended December 31, 2019.

The decrease was primarily due to a decrease in preferred return related to the repayment of two preferred equity investments in June 2019 and January 2020, respectively, of $1.3 million and a decrease in interest income of $1.6 million 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, partially offset by approximately $1.2 million of interest income related to our mortgage and other loans receivable that we provided to Manteca in July 2019, CommuniCare in September 2019, Cascade in February 2020 and a mezzanine loan to Next VA Star Realty Holdings, LLC in November 2020.

See Note 4, Other Real Estate Investments, Net.

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Depreciation and amortization expense increased $0.9 million, or 2%, for the year ended December 31, 2020 to $52.8 million compared to $51.8 million for the year ended December 31, 2019.

The $6.1 million increase was primarily due to new real estate investments made after January 1, 2018, partially offset by assets sold or designated as assets held for sale.

The $0.9 million increase was primarily due to depreciation and amortization of $3.4 million related to new real estate investments made after

January 1, 2019, partially offset by $2.0 million of depreciation related to the disposal of assets and $0.5 million due to assets becoming fully depreciated during the year ended December 31, 2020.

Interest expense.

Interest expense increased $0.2 million, or 1% , for the year ended December 31, 2019 to $28.1 million compared to $27.9 million for the year ended December 31, 2018 primarily due to a higher weighted average debt balance, partially offset by lower weighted average interest rates.

Interest expense decreased $4.5 million, or 16%, for the year ended December 31, 2020 to $23.7 million compared to $28.1 million for the year ended December 31, 2019 due to a lower weighted average debt balance of approximately $18.0 million and lower weighted average interest rates of approximately 0.7%.

Property taxes .

Property taxes decreased $0.2 million, or 7%, for the year ended December 31, 2020 compared to December 31, 2019.

The decrease was primarily due to $1.0 million of property taxes related to the disposal of assets and the transfer of certain properties to new operators in the year ended December 31, 2020 that make direct tax payments, partially offset by property taxes of $0.8 million due to new real estate investments made after January 1, 2019.

Impairment of real estate investments.

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

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

Additionally, in the three months ended September 30, 2019 , we met the criteria to classify six skilled nursing facilities 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.

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 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 operated by Metron as held for sale, which resulte d 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 year ended December 31, 2020.

Provision for loan losses.

During the year ended December 31, 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 year ended December 31, 2020.

General and administrative expense.

General and administrative expense increased $1.1 million, or 8%, for the year ended December 31, 2020 to $16.3 million compared to $15.2 million for the year ended December 31, 2019.

The increase is primarily related to higher cash wages of $1.3 million, increased amortization of stock-based compensation of $0.3 million, increased professional services of $0.5 million and $0.4 million of other corporate expenses.

The increase is primarily related to higher cash wages of $1.0 million, an increase of $0.4 million in state franchise tax and a $0.2 million increase in due diligence costs, partially offset by a decrease of $0.3 million related to stock-based compensation and $0.1 million related to other corporate expenses.

Gain on sale of real estate .

During the year ended December 31, 2020, we recorded a $0.1 million loss on sale of real estate related to the sale of six skilled nursing facilities and a $20,000 gain on sale of real estate related to the sale of our last remaining owned and operated ILF.

Du ring the year ended December 31, 2019, we recorded a $1.6 million gain on sale of real estate related to the sale of one independent living facility and a $0.2 million gain on sale of real estate related to the sale of three skilled nursing facilities.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

For discussion related to the results of operations and changes in financial condition for fiscal 2019 compared to fiscal 2018, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our fiscal 2019 Annual Report on Form 10-K, which was filed with the SEC on February 20, 2020.

j Liquidity and Capital Resources

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.

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As of December 31, 2020, we had cash and cash equivalents of $18.9 million .

During the year ended December 31, 2019 , we sold 2.5 million shares of common stock under our Prior ATM Program for gross proceeds of $47.9 million .

No shares of common stock were sold under the New ATM Program during the year ended December 31, 2019 and, as of December 31, 2019 , we had $300.0 million available for future issuances under the New ATM Program.

As of December 31, 2019 , there was $60.0 million outstanding under the Revolving Facility (as defined below).

During the year ended December 31, 2019, we sold 2.5 million shares of common stock under our predecessor ATM Program for gross proceeds of $47.9 million.

No shares of common stock were sold under the New ATM Program or Prior ATM Program during the year ended December 31, 2020 and, as of December 31, 2020, we had $500.0 million available for future issuances under the New ATM Program.

As of December 31, 2020, there w as $50.0 million outstanding under the Revolving Facility (as defined below).

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

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

proceeds from sales of shares of our common stock pursuant to our New ATM Program or additional issuances of common stock or other securities.

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

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

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We have filed an automatic shelf registration statement with the U.S.

Securities and Exchange Commission that expires in May 2020, which allows us or certain of our subsidiaries, as applicable, to offer and sell shares of common stock, preferred stock, warrants, rights, units and debt securities through underwriters, dealers or agents or directly to purchasers, in one or more offerings on a continuous or delayed basis, in amounts, at prices and on terms we determine at the time of the offering.

We expect to renew the automatic shelf registration statement on or prior to its expiration.

Securities and Exchange Commission that expires in March 2023, which will allow us or certain of our subsidiaries, as applicable, to offer and sell shares of common stock, preferred stock, warrants, rights, units and debt securities through underwriters, dealers or agents or directly to purchasers, in one or more offerings on a continuous or delayed basis, in amounts, at prices and on terms we determine at the time of the offering.

Although we are subject to restrictions on our ability to incur indebtedness, we expect that we will be able to refinance existing indebtedness or incur additional indebtedness for acquisitions or other purposes, if needed.

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Net cash used in investing activities (41,582) (316,007)

Net cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net cash (used in) provided by financing activities (105,561) 173,247

Net decrease in cash and cash equivalents (1,408) (16,465)

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

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Net cash provided by operating activities for the year ended December 31, 2020 was $145.7 million compared to $126.3 million for the year ended December 31, 2019, an increase of $19.4 million.

The increase was primarily due to an increase in rental income due to acquisitions, increases in rental rates for existing tenants subsequent to December 31, 2018 and timing of payments to our vendors in settling accounts payable, partially offset by a decrease in collectibility of base cash rental income.

Cash used in investing activities for the year ended December 31, 2019 was primarily comprised of $339.7 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 partially offset by $26.5 million of payments received from our preferred equity investment and mortgage and other loans receivable and $3.5 million in net proceeds from real estate sales.

Cash used in investing activities for the year ended December 31, 2018 was primarily comprised of $122.3 million related to acquisitions of real estate and investments in other loans receivable and $9.0 million of improvement in real estate and purchases of furniture, fixtures and equipment, partially offset by $13.0 million of net proceeds from real estate sales and $3.2 million of payments received from our mortgage and other loans receivable.

Our cash flows provided by financing activities for the year ended December 31, 2019 were primarily comprised of $196.0 million in net proceeds from common stock sales under our Prior ATM Program and April 2019 equity offering and $65.0 million in net borrowings under our Amended Credit Facility and Prior Credit Facility, partially offset by $80.6 million in dividends paid, $4.5 million in payments of deferred financing costs and $2.5 million net settlement adjustment on restricted stock.

Our cash flows provided by financing activities for the year ended December 31, 2018 were primarily comprised of $179.9 million in net proceeds from common stock sales under our Prior ATM Program, partially offset by $63.0 million in dividends paid, $70.0 million in net pay downs under our Prior Credit Facility and $1.3 million net settlement adjustment on restricted stock.

The increase was primarily due to an increase of $12.9 million in rental income due to acquisitions, $5.0 million in improved rent collections compared to the prior year, $1.8 million in increases in rental rates for existing tenants subsequent to December 31, 2018, a decrease of $4.5 million in interest paid on outstanding indebtedness due to lower weighted average interest rates and a lower weighted average debt balance, $1.2 million of lease termination revenue and $1.0 million from recovery of previously reversed rent, partially offset by a decrease in rental income of $6.2 million due to the disposal of assets in September 2019 and February 2020 and higher cash wages of $1.0 million.

Cash used in investing activities for the year ended December 31, 2020 was primarily comprised of $123.1 million in acquisitions of real estate, investments in real estate mortgage and other loans receivable and escrow deposits for potential acquisitions, and $8.3 million of purchases of, and improvements to, e quipment, furniture and fixtures and real estate, partially offset by $83.3 million of payments received from our preferred equity investment and mortgage and other loans receivable and $6.6 million in net proceeds from real estate sales.

C ash used in investing activities for the year ended December 31, 2019 was primarily comprised of $339.7 million in acquisitions of real estate, investments in real estate mortgage and other loans receivable and $6.3 million of purchases of, and improvements to, e quipment, furniture and fixtures and real estate , partially offset by $26.5 million of payments received from our preferred equity investment and mortgage and other loans receivable and $3.5 million in net proceeds from real estate sales.

Our cash flows used in financing activities for the year ended December 31, 2020 were primarily comprised of $93.2 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 $10.0 million in net repayments under our Amended Credit Facility (as defined below).

Our cash flows provided by financing activities for the year ended December 31, 2019 were primarily comprised of $196.0 million in net proceeds from common stock sales under our predecessor ATM Program and April 2019 equity offering and $65.0 million in net borrowings under our Amended Credit Facility and Prior Credit Facility, partially offset by $80.6 million in dividends paid, $4.5 million in payments of deferred financing costs and $2.5 million net settlement adjustment on restricted stock.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

For discussion related to the cash flows for fiscal 2019 compared to fiscal 2018, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our fiscal 2019 Annual Report on Form 10-K, which was filed with the SEC on February 20, 2020.

Senior Unsecured Notes

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

On May 10, 2017, our wholly owned subsidiary, CTR Partnership, L.P.

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

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

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

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

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

As of December 31, 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.

The obligations under the Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by CareTrust REIT and certain of CareTrust REIT’s wholly owned existing and, subject to certain exceptions, future material subsidiaries (other than the Issuers);

The obligations under the Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by CareTrust REIT (the “Parent Guarantor”) and CareTrust REIT’s wholly owned existing and, subject to certain exceptions, future material subsidiaries (other than the Issuers) (the “Subsidiary Guarantors”);

provided, however, that such guarantees are subject to automatic release under certain customary circumstances, including if the Subsidiary Guarantor is sold or sells all or substantially all of its assets, the Subsidiary Guarantor is designated “unrestricted” for covenant purposes under the indenture, the Subsidiary Guarantor’s guarantee of other indebtedness which resulted in the creation of the guarantee of the Notes is terminated or released, or the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied.

See Note 12, Summarized Condensed Consolidating Information .

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

CareTrust REIT, Inc.

– The Parent Guarantor was formed on October 29, 2013 and became a separate and independent publicly-traded company on June 1, 2014.

The Parent Guarantor has not conducted any operations or had any business since that time.

CTR Partnership, L.P.

and CareTrust Capital Corp.

– The Issuers, each of which is a wholly owned subsidiary of the Parent Guarantor, were formed on May 8, 2014 and May 9, 2014, respectively.

The Issuers did not conduct any operations or have any business prior to June 1, 2014, the date the Parent Guarantor became a separate and independent publicly-traded company.

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

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

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

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

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

The Parent Guarantor conducts a substantial portion of its business operations through the Subsidiary Guarantors.

The assets and liabilities and results of operations of the combined guarantors (the Parent Issuer and the Subsidiary Guarantors) and the Issuers of the Notes are not materially different than the corresponding amounts presented in our consolidated financial statements.

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

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incur or guarantee secured indebtedness;

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

make certain investments or other restricted payments;

enter into transactions with affiliates;

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

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

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

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

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

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

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

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

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

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On February 8, 2019, the Operating Partnership, as the borrower, the Company, as guarantor, CareTrust GP, LLC, and certain of the Operating Partnership’s wholly owned subsidiaries entered into an amended and restated credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender, and the lenders party thereto (the “Amended Credit Agreement”).

The Amended Credit Agreement, which amended and restated the Prior

Credit Agreement, provides for:

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

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

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The interest rates applicable to loans under the Term Loan are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.50% to 1.20% per annum or LIBOR plus a margin ranging from 1.50% to 2.20% per annum based on the debt to asset value ratio of the Company and its consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if the Company obtains certain specified investment grade ratings on its senior long-term unsecured debt).

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

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

As of December 31, 2020, we had $200.0 million outstanding under the Term Loan and $50.0 million outstanding under the Revolving Facility.

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Payments Due by Period

1 Year 1 Year

3 Years 3 Years

Senior unsecured notes payable (1) $ 370,875 $ 15,750 $ 31,500 $ 323,625 $ —

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Operating lease 3,793 261 337 104 3,091

Total $ 645,001 $ 20,910 $ 90,227 $ 330,416 $ 203,448

(1) Amounts include interest payments of $70.9 million.

(2) Amounts include interest payments of $17.1 million.

Amounts include payments related to the credit facility fee.

(3) Amounts include payments related to the credit facility fee of $1.9 million and interest payments of $1.3 million.

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 under the Ensign Master Leases, the tenant will have an option to require us to finance certain capital expenditures up to an aggregate of 20% of our initial investment in such property, subject to a corresponding rent increase at the time of funding.

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

As of December 31, 2019 , we had committed to fund expansions, construction and capital improvements at certain triple-net leased facilities totaling $13.5 million, of which $11.8 million is subject to rent increase at the time of funding.

Capital expenditures for each property leased under our triple-net leases are generally the responsibility of the tenant, except that, for the facilities leased to subsidiaries of The Ensign Group, Inc.

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, which are subject to tenant compliance with the conditions to our approval and funding of their requests.

As of December 31, 2020, we had committed to fund expansions, construction and capital improvements at certain triple-net leased f acilities totaling $15.4 million, of which $14.2 million is subject to rent increase at the time of funding.

Critical Accounting Policies

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We consider the period of future benefit of an asset to determine its appropriate useful life.

Expenditures for tenant improvements are capitalized and amortized over the shorter of

the tenant’s lease term or expected useful life.

Expenditures for tenant improvements are capitalized and amortized over the shorter of the tenant’s lease term or expected useful life.

Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment.

We anticipate the estimated useful lives of our assets by class to be generally as follows:

Building improvements

Tenant improvements

Shorter of lease term or expected useful life

Integral equipment, furniture and fixtures

Identified intangible assets

Shorter of lease term or expected useful life

Buildings 25-40 years

Building improvements 10-25 years

Tenant improvements Shorter of lease term or expected useful life

Integral equipment, furniture and fixtures 5 years

Identified intangible assets Shorter of lease term or expected useful life

Real Estate Acquisition Valuation .

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Acquisition costs are capitalized as incurred.

We allocate the acquisition costs to the tangible assets, identifiable intangible assets/liabilities and assumed liabilities on a relative fair value basis.

We assess fair value based on available market information, such as capitalization and discount rates, comparable sale transactions and relevant per square foot or unit cost information.

We allocate the acquisition costs to the tangible assets, identifiable intangible assets/liabilities and assumed liabilities on a relative fair value ba sis.

We exercise judgment to determine the key assumptions used to allocate the purchase price of real estate acquired among its components.

W e assess fair value based on available market information, such as capitalization and discount rates, comparable sale transactions and relevant per square foot or unit cost information.

A real estate asset’s fair value may be determined utilizing cash flow projections that incorporate such market information.

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The use of different assumptions in these fair value inputs could significantly affect the reported amounts of the allocation of the acquisition on a relative fair value basis and the related depreciation expense recorded for such assets.

We have not materially changed the assumptions used in the analysis during the year ended December 31, 2020.

As part of the real estate acquisitions, we may commit to provide contingent payments to a seller or lessee (e.g., an earn-out payable upon the applicable property achieving certain financial metrics).

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If indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying facilities.

The most significant inputs to the undiscounted cash flows include, but are not limited to, facility level financial results, a lease coverage ratio, the intended hold period by the Company, and a terminal capitalization rate.

The most significant inputs to the undiscounted cash flows include, but are not limited to, facility level financial results, a lease coverage ratio, the intended hold period by the Company, and a

terminal capitalization rate.

The analysis is also significantly impacted by determining the lowest level of cash flows, which generally would be at the master lease level of cash flows.

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Upon designation as held for sale, we write down the excess of the carrying value over the estimated fair value less costs to sell, resulting in an impairment of the real estate investments, if necessary, and cease depreciation.

In the event of impairment, the fair value of the real estate investment is based on current market conditions and considers matters such as 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.

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.

Our ability to accurately estimate future cash flows and estimate and allocate fair values impacts the timing and recognition of impairments.

While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on financial results.

While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on financial re sults.

We have not materially changed the assumptions used in the analysis during the year ended December 31, 2020.

Other Real Estate Investments.

Included in Other Real Estate Investments, Net on our consolidated balance sheet, is one preferred equity investment and two mortgage loans receivable.

The preferred equity investment is accounted for at unpaid principal balance, plus accrued return, net of reserves.

Included in other real estate investments, net on our consolidated balance sheets at December 31, 2020, is one mezzanine loan receivable.

At December 31, 2019, included in other real estate investments, net is one preferred equity investment and two mortgage loans receivable.

The preferred equity investment was accounted for at unpaid principal balance, plus accrued return, net of reserves.

We recognize return income on a quarterly basis based on the outstanding investment including any accrued and unpaid return, to the extent there is outside contributed equity or cumulative earnings from operations.

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Any unpaid accrued preferred return, whether recorded or unrecorded by us, will be repaid upon redemption or as available cash flow is distributed from the joint venture.

Our two mortgage loans receivable are recorded at amortized cost, which consists of the outstanding unpaid principal balance, net of unamortized costs and fees directly associated with the origination of the loan.

Interest income on our mortgage loans receivable is recognized over the life of the investment using the interest method.

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

We evaluate at each reporting period each of our other real estate investments for indicators of impairment.

An investment is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms.

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

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

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

Interest income on our mortgage and mezzanine loans receivable was recognized over the life of the applicable investment using the interest method.

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

For instruments recorded at amortized cost, we evaluated at each reporting period each of our other real estate investments for indicators of impairment.

An investment is impaired when, based on current information and events, it was probable that we would be unable to collect all amounts due according to the existing contractual terms.

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

We adopted ASU 2016-13 on January 1, 2020.

With our 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 our then outstanding mortgage loans receivable, for which we elected the fair value option as provided for by ASU 2019-05.

Fair value 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.

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 our consolidated income statements.

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

As of December 31, 2020, we had one mezzanine loan receivable for which the fair value option had been elected.

Revenue Recognition.

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 and recognize revenue on a straight-line basis over the lease term if deemed probable of collection.

On January 1, 2019, we elected the single component practical expedient, which allows a lessor, by class of underlying asset, not to allocate the total consideration to the lease and non-lease components based on their relative stand-alone selling prices where certain criteria are met.

This single component practical expedient requires us to account for the lease component and non-lease component(s) associated with that lease as a single component if (i) the timing and pattern of transfer of the lease component and the non-lease component(s) associated with it are the same and (ii) the lease component would be classified as an operating lease if it were accounted for separately.

If we determine that the lease component is the predominant component, we account for the single component as an operating lease in accordance with the new lease ASUs.

Conversely, we are required to account for the combined component under the revenue recognition standard if we determine that the non-lease component is the predominant component.

As a result of this assessment, rental revenues and tenant recoveries from the lease of real estate assets that qualify for this expedient are accounted for as a single component under the new lease ASUs, with tenant recoveries primarily as variable consideration.

Tenant recoveries that do not qualify for the single component practical expedient and are considered non-lease components are accounted for under the revenue recognition standard.

The components of our operating leases qualify for the single component presentation.

Tenant reimbursements related to property taxes and insurance are neither lease nor non-lease components under the new lease ASUs.

We recognize lease revenue in accordance with ASC 842, Leases .

Our 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, we generally recognize lease revenue on a straight-line basis of accounting.

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.

Tenant reimbursements related to property taxes and insurance paid by lessee directly to a third party on behalf of a lessor are required to be excluded from variable payments and from recognition in the lessors’ income statements.

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.

For the year ended December 31, 2018, we recognized tenant recoveries for real estate taxes of $11.9 million, which were classified as tenant reimbursements on our consolidated income statements.

Prior to the adoption of Accounting Standards Codification (“ASC”) 842, we recognized tenant recoveries as tenant reimbursement revenues regardless of whether the third party was paid by the lessor or lessee.

Prior to the adoption of ASC 842, we recognized tenant recoveries as tenant reimbursement revenues regardless of whether the third party was paid by the lessor or lessee.

Effective January 1, 2019, such tenant recoveries are recognized to the extent that we pay the third party directly and classified as rental income on our consolidated income statements.

Due to the application of the new lease ASUs, we recognized, on a gross basis, tenant recoveries related to real estate taxes of $2.9 million for the year ended December 31, 2019 .

Under the new lease ASUs, our assessment of collectibility of 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.

This assessment involves significant judgment by management and considers the operator’s performance and anticipated trends, payment history, and the existence and creditworthiness of guarantees, among other factors.

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

For such leases that are deemed not probable of

collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectibility determination.

For the year ended December 31, 2019 , we recorded $11.8 million of adjustments to rental income related to recognized rental income in the current quarter and prior periods.

Due to the application of ASC 842, we recognized, on a gross basis, tenant recoveries related to real estate taxes of $3.1 million and $2.9 million, for the years ended December 31, 2020 and December 31, 2019, respectively.

Our assessment of collectibility of 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.

For such leases that are deemed probable of collection, revenue continues to be 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 and recoveries are recorded as decreases or increases through rental income on our consolidated income statements.

For the year ended December 31, 2020, we recorded recovery adjustments of $1.0 million and did not recognize any write-off adjustments to rental income.

For the year ended December 31, 2019, we recorded $11.8 million of write-off adjustments to rental income related to rental income recognized in prior periods.

See Note 3, Real Estate Investments, Net, in the Notes to the Consolidated Financial Statements for further detail.

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Our rental income in future years will be impacted by changes in inflation.

Almost all of our triple-net lease agreements, including the Ensign Master Leases, provide for an annual rent escalator based on the percentage change in the Consumer Price Index (but not less than zero), subject to maximum fixed percentages.

Almost all of our triple-net lease agreements, including the Ensign leases, provide for an annual rent escalator based on the percentage change in the Consumer Price Index (but not less than zero), subject to maximum fixed percentages.

Off-Balance Sheet Arrangements

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-K

Item 7. Management’s Discussion and Analysis